HKDSE BAFS - PFM - Time Value of Money - Summary Concept Questions
What are the major connects involved in time value of money calculations?
Compounding and discounting are the major concepts involved in time value of money calculations.
What is the process of compounding and discounting?
Compounding is the process of finding future value while discounting is the process of finding present value.
What is future value and present value?
Future value is the value at the end of a time period from a sum of money today. Present Value is the current value of a future sum of money
What does it mean if the NPV = Zero?
If an investment's NPV is equal to zero, a firm or individual should invest in it.
What does it mean if the NPV = Negative?
If an investment's NPV is negative, a firm or individual should not invest in it.
What does it mean if the NPV = Positive?
If an investment's NPV is positive, a firm or an individual should invest in it.
What is the NPV used for? What does it equal?
Net present value (NPV) is employed to make investment decisions. It is equal to the PV of future net cash inflows, less the initial outlay.
What causes the difference between nominal and effective rates of return?
The difference between nominal and effective rates of return is due to differences in the frequency of compounding.
Whe is time value of money an important concept in finance?
The time value of money is an important concept in finance. We often use it when making financial decisions.
Why is a dollar received today worth more than a dollar received in the future?
The time value of money means that a dollar received today is worth more than a dollar received in the future because of the effect of compounding.
What are the two fundamental concepts of the time value of money?
The two fundamental concepts of the time value of money are future value (FV) and present value (PV).
Which rate of return should we utilise when comparing different investment plans that have different frequency of compounding?
When comparing different investment plans, we should use the effective rate of return if the frequency of compounding differs.
