FIN: Ch 5 Introduction to Valuation: The Time Value of Money

What is the future value of $1000 invested for 8 years at 6%?

$1,593.85 1000 for PV 8 for n and 6 for 1/Y

What is the future value of $100 compounded for 50 years at 10 percent annual interest?

$11,739.09

Suppose we invest $100 now and get back $236.74 in 10 years. What rate of interest will we achieve?

9% ($236.74/$100)^1/10-1

Which of the following investments would result in a higher future value? Investment A: 12%APR for 10yrs Investment B: 12%APR for 12yrs

investment B

The basic present value equation underlies many of the:

most important ideas in corporate finance

The following equation results in the _________ value interest factor for a single deposit: 1/(1+r)^t

present

If you invest $100 at 10 percent simple interest, how much will you have in 10 years?

$200

If you plan to put $10,000 down payment on a house in five years and you can earn 6% per year, how much will you need to deposit today?

$7472.58

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

(1 + r)

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

cash

T or F: Discounting is the opposite of compounding.

True

T or F: Small changes in the interest rate do not really matter when dealing with millions or billions of dollars over 30 or 40 years.

False

T or F: the correct mathematical formula for finding the future value of a $68 present value in 12 years at 9 percent annual interest is FV = $68(1.12^9)

False FV=$68(1.09^12)

If you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you will first need to find a(n) ______________ value.

present

Suppose present value is $100, Future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?

r=(1000/100)^(1/10)-1

Which of the following methods can be used to calculate present value?

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

which of the following are correct spreadsheet functions?

-Present value= PV (rate,nper,pmt,fv) -Future value= FV (rate,nper,pmt,pv) -Discount Rate= RATE (nper,pmt,pv,fv)

Which of the following can be determined using the future value approach to compound growth developed in this chapter?

-Sales growth -Dividend growth -Population growth

If the interest rate is 10% per year and the money is invested for 10years, what is the present value discount factor?

0.3855 1/(1.10)^10

Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?

FV = $100 X (1.10)^3

The difference between _____________ interest and compound interest is that the amount compound interest earned gets ______________ every year.

Simple; Bigger

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

T or F: Given the same rate of interest, more money can be earned with compound interest than with simple interest.

True

T or F: The correct future value interest factor in a time value of money table for $100 in 10 years at 10 percent per year is 2.5937?

True

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

cash

The idea behind ______________ is the interest is earned on interest.

compounding

you are planning to buy a house in a few years, and would like to put money in an account today to save for a down payment in future. Assuming the interest rate offered for a 10 year investment plan is same as for a 4 year investment plan. Which of these two plans would require a smaller savings amount to be deposited today?

10 year investment The longer time period you have before you'll need the money, the less you'll need to deposit today at the same interest rate.

How long it will take $40 to grow $240 at an interest rate of 6.53% compounded annually?

28.33 -40 for PV 240 for FV 6.53 for I/Y Solve for N

T or F: The multi-period formula for compounding is FV = (1+r)^t

False FV = PV X ( 1 + r )^t

T or F: When using the time value of money feature of a financial calculator, you should key in the interest rate as a decimal.

False The calculator is programmed to interpret 10 as 10%, and 0.1 as 0.1%

which formula below represents a present value factor?

1/(1+r)^t