Chapter 5

The basic present value equation underlies many of the _____.

most important ideas in corporate finance

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

present

The _____ value is the current value of future cash flows discounted at the appropriate discount rate.

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

The discount rate is also called the rate of

return

Interest earned on the original principal amount invested is called _____.

simple interest

Interest earned only on the original principal amount invested is called

simple interest

The difference between _______ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ___________ every year.

simple; bigger

When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.

the same

If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ____.

$121.00

If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?

$133.10

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

$600; $605 Reason: With simple interest you will earn $500 X 0.10 = $50 each year. Your total will be $500+100=$600. With compound interest, you will have $500(1.10)2 = $605 at the end of the two years. Given the same rate of interest, the FV will always be higher with compound interest.

Which formula will you enter into a spreadsheet cell to determine how long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually?

=NPER(0.0653,0,−40,240)

Which of the following are correct spreadsheet functions?

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

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

Dividend growth Sales growth

True or false: The multi-period formula for future value using compounding is FV = (1 + r)t.

FALSE FV = PV × (1 + r)^t

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 × (1.10)^3

____ value is the cash value of an investment at some time in the _____

Future Future

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

Investment B

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

TRUE

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 same rate of interest, more money can be earned with compound interest than with simple interest.

True

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

cash

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

compounding

The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called

compounding

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