Finance chapter 4 concepts
You must invest ___ today at 8% to get $2 in one year
=1.85
Future Value
The amount an investment is worth after one or more periods. - "Later" money on a time line FV = PV(1 + r)t
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
using time value of money table, what is the future value interest factor for 10% for 2 years
1.21
which formula below represents a present value factor
1/(1+r)2
Invest $500 at 8% per year over 15 years.
- How much would you have at the end of 15 years using compound interest? • 15 N, 8 I/Y, -500 PV, 0 PMT, CPT FV 1586.08 • 500(1.08)15 = 1586.08 • =FV(.08, 15, 0, -500) - How much would you have using simple interest? • 500 + 15(500)(.08) = 1,100
simple interest compound interest.
- Interest earned only on the original principal - FV w/simple interest = 100 + 10 + 10 = 120 - Interest earned on principal and on interest received - "Interest on interest" - interest earned on reinvestment of previous interest payments - FV w/compound interest =100(1.10)2 = 121.00 - The extra 1.00 comes from the interest of .10(10) = 1.00 earned on the first interest payment
Present Value
- The current value of future cash flows discounted at the appropriate discount rate - Value at t=0 on a time line
discount cash flow valuation
-calculating the PV of a future cash flow to determine its value today - process of valuing an investment by discounting its future cash flow
discount rate
-rate used to calculate the present value of future cash flow. To find the implied interest rate, rearrange the basic PV equation and solve for r: FV = PV(1 + r)t r = (FV / PV)1/t - 1 = ƒ (time, risk)
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)
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
Which of the following methods are used to calculate present value?
a financial calculator a time value of money table a algebraic formula
discounting
calculation of present value of one or more of future amount.
process of accumulating interest in an investment over time to earn more interest is called ____
compounding
future value refers to the amount of money an investment is worth today
false
which of the following are the primary as well as easy ways used to perform financial calculations today
financial calculator spreadsheet functions
the amount an investment is worth after one or more periods is called the ___ value
future
what does it mean to be compounding discounting
process accumulating interest in an investment over time to earn more interest earning interest on interest
you invest $500 at 10% interest per annum. AT THE END OF 2 YEARS with simple interest you will have ___ and with compound interest you will have ___
simple interest =500(.10)=50 times 2 years=100 total adding the original yields $600 compound=500(1.10)2=605
for a given time period (t) and interest rate (r), the present value factor is ____ the future value factor
the reciprocal 1 divided by
100 now and recieve 259.37 in 10 years. what rate of interest will we achieve
10%
The present value interest factor for $1 at 5% compounded annually for 5 year [PVIF(5&,5)]
1/(1.05)5=0.7835 bc 5 years 1/(1+.05)5 1/(1.05)5 1/1.27628 =.783526
if you invest $100 at 10 percent compound annually, how much money will you have at the end of the 3 years
133.10
the future value of a $100 investment on 4 years compounded at 8% per year=
136.05
if a firm sales are growing at 5% per year, how long will it take for the firm's sales to triple
22.5 years
Time value money tables are not as common as they once were because
they are available for only a relatively small number of interest it is easier to use inexpensive financial calculators
The real world has moved away from using ____ for calculating future and present values.
time value of money tables
how long will it take $40 to grow to $240 at an interest rate of 6.53% compounded annually?
28.33 years
if you invest $500 for one year at a rate of 8% per year, how much interest will you earn?
500*8%= 40
value is 1.100 the future value in 1,200 after one year. interest rate
9%
if you wish to find the future value of $100 invested at 10% for 5 years. which is the excel function
=FV(.10,5,0,-100)
given an investment amount and a set rate interest, the ___ the time horizon the ___ the future value
longer, greater
The current value of future cash flow discounted at the appropriate rate is called the ____ value
present
to calculate the future value of $100 investment 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.
which of the following is the multi period for compounding a present value into a future value
FV= PV X (1+r)t
If you invest $100 for 5 years at 10% interest compounded annually, which of the following will be the formula for the future value of your investment?
FV=100*(1.10)5