Ch. 5 - The Time Value of Money

formula for present value factor

1/(1+r)^t

t/f discounting is the opposite of compounding

true

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

(1+r)

if you invest 100 at 10% simple interest how much will you have in 10 years

200

you invest $500 at 10% interest. at the end of 2 years with simple interest you will have ____ and with compound interest you will have ____

600;605 with simple interest you will earn 500x0.10=50. your total will be 500+100=600. with compound interest you will have 500(1.10)^2= 605 at the end of two years

which of the following can be determined using the future value approach to compound growth developed in this chapter. check all that apply a. population growth b. erratic growth c. sales growth d. dividend growth

a,c,d

which of the following would result in a higher future value a - 12% for 10 years b - 12% for 12 years

b because the rates are the same, b would give a higher future value because on additional period of interest is earned

Future value is the _____ value of an investment at some point in the future

cash

the idea behind _____ is that interest is earned on interest

compounding

t/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/f when using the time value of money features on a financial calculator, you should key in the interest rate as a decimal

false!!!!

a dollar received one year from today has ____ value than a dollar received today

less

the basic present value equation underlies may of the

most important ideas in corporate finance

suppose pv = 100 and fv=1000 and n=10. which formula is used to find the interest rate

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

the difference between a _____ interest and compound interest is that compound interest (increase/decreases) ______ with time

simple; increases

t/f given the same rate of interest, more money can be earned with compound interest rather than with simple interest

true