Smartbook 5

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The present value interest factor for $1 at 5% compounded annually for 5 years [PVIF(5%,5)] is:

0.7835 1 / (1.05)^5

Which formula below represents a present value factor?

1 / (1 + r) ^ t

Using a time value of money table, what is the future value interest factor for 10% of 2 years?

1.21

Which of the following are correct spreadsheet functions?

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

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

False FV = $68 (1.09^12)

T/F - The multi-period formula for future value using compounding is FV = (1 + r)^t

False FV = PV x (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

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

cash

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

sales growth dividend growth

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

$200

If you plan to put a $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?

$7,472.58 Enter 10,000 for FV 5 for N 6 for I/Y Solve for PV

Assuming the interest rate offered for a 10 year investment plan is same as for a 4 year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?

10 year investment

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

28.33 years Use financial calculator -40 for PV 240 for FV 6.53 for I/Y solve for N

T/F - When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal

False

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

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

T/F - The formula for a present value factor is 1 / (1 + r)^t

True This is the present value interest factor, not the present value itself. In order to get PV, you need to multiply FV by this factor. Notice how as the denominator becomes larger due to higher interest or longer periods, it reduces the factor

T/F - Discounting is the opposite of compounding

True compounding increases money forward in time, discounting reduces money back in time

The idea behind ___ is that interest is earned on interest

compounding

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

T/F - The correct future value interest factor in time value of money table for $1 in 10 years at 10 percent per year is 2.5937

True

A dollar received one year from today has ___ value than a dollar received today

less

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

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 need to find a(n) ___ value

present

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

present

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

$11.739.09 FV = $100 x 1.10^50

T/F - Small change in the interest rate affect the future value of a small-term investment more than they would affect the value of a long-term investment

False small rate differences can be worth thousands of dollars, especially when either the amount or the time period is large

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

a financial calculator a time value of money table an algebraic formula

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

9.0% (236.74 / 100)^ 1/10 - 1

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

simple bigger

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

$121

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

$133.10 FV.= $100 x 1.10^3

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 $500 + $100 = $600 $500 (1.10)^2 = $605

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

(1 + r)


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