Business Finance Ch 4 Reading - Connect

Which of the following is the multi-period formula for compounding a present value into a future value?

FV = PV×(1 + r)^t

True or false: Future value refers to the amount of money an investment is worth today.

False

True or false: Given the PV, FV, and payment amount, you can determine the number of periods.

False

True or false: The present value is the sum of all expenses in a project.

False

True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.

False

True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

False

True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.

Fasle

The amount an investment is worth after one or more periods is called the _____ value.

Future

Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r per cent interest?

PV = FV / ((1+r)^t)

If FV= PV x (1+r) is the single period formula for future value, which of the following is the single period present value formula?

PV = FV/(1+r)

The basic present value equation is:

PV=FV^t / (1+r)^t

A dollar received one year from today has ______ value than a dollar received today.

less

When dealing with compound interest, it is more financially advantageous to have a _____ time horizon for investment.

longer

Given an investment amount and a set rate of interest, the _____ the time horizon the _____ the future value.

longer; greater

The concept of the time value of money is based on the principle that a dollar today is worth __________ a dollar promised at some time in the future.

more than

The current value of a future cash flow discounted at the appropriate rate is called the _____ value.

present

With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.

present; future

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.

(1+r)

For a given time period (t) and interest rate (r), the present value factor is _______ the future value factor. (Select all that apply.)

- 1 divided by - the reciprocal of

Which of the following methods are used to calculate present value?

- A time value of money table - A financial calculator - An algebraic formula

Which of the following are the primary as well as easy ways used to perform financial calculations today?

- Financial calculator - Spreadsheet functions

Time value of money tables are not as common as they once were because:

- it is easier to use inexpensive financial calculators instead - they are available for only a relatively small number of interest rates.

Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?

1.21

Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?

1.4400

Which formula below represents a present value factor?

1/((1+r)^t)

Which of the following is the correct Excel function to calculate the present value of $300 due in 5 years at a discount rate of 10%?

=PV(0.10,5,0,-300)

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?

Because the $100 is an outflow from you which should be negative.

Using the PV, discount rate, and _____________ , you can determine the number of periods. (Enter abbreviation only.)

Blank 1: FV

FV = _____________-×(1 + r)^t

Blank 1: PV

Future value is the ________ value of an investment at some time in the future.

Blank 1: cash

In a present value equation, the _____________ rate (r) can be found using the PV, FV, and t. (Enter one word per blank.)

Blank 1: discount

The present value is the current value of the __________ cash flows discounted at the appropriate discount rate.

Blank 1: future

With __________ interest, the interest is not reinvested

Blank 1: simple

If you invest at a rate of r for _________ periods, under compounding, your investment will grow to (1+r)^2 per dollar invested.

Blank 1: two

What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?

The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal.

Why is a dollar received today worth more than a dollar received in the future?

Today's dollar can be reinvested, yielding a greater amount in the future.

True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.

True

True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1+r)^2 per dollar invested.

True

True or false: The formula for a present value factor is 1/ ((1+r)t)

True

The idea behind ______ is that interest is earned on interest.

compounding

The process of accumulating interest in an investment over time to earn more interest is called _________.

compounding

Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.

discounted cash flow (DCF)