Time Value of Money

If you have $100 today, what is the FV of that $100 in one year's time if you earn 6% interest per year?

$106

Using a Future Value (FV) calculation in Microsoft Excel, if you deposit $100 in an account earning 6% interest with monthly compounding, how much would you have in the account after 5 years?

$134.89

If you invest $1,000 each year at 8% for three years, what is the present value?

$2577.10

If you invest $1,000 each year at 8%, how much would you have after 3 years?

$2783.26

If you invest $1,000 at the beginning of each of the next 3 years at 8%, how much would you have at the end of year 3?

$3506.11

If you receive $1000 fifteen years from now, what is the PV of that $1000 if you use a 7% interest or discount rate?

$353.14

Payment (PMT) calculates the payment for a loan based on constant payments and a constant interest rate. If you borrow $100,000 at 7% fixed interest for 30 years in order to buy a house, what will be your monthly house payment?

$665.30

Suppose you are considering graduate school that costs $25,000 and provides an incrementally higher salary of $10,000/year for forty years. Assume you can invest your money otherwise and receive 10% interest. What is the NPV of the decision to attend graduate school?

$72,791

If you receive $100 five years from now, what is the PV of that $100 if you use a 6% interest or discount rate?

$74.73

We call an annuity "ordinary" because the first payment is due at the end of the period. Microsoft Excel uses a type of _____ to represent this payment at the end of a period.

0

In Excel, the [Type] is shown as _____ for beginning of period cash flows.

1

Rate calculations return the interest rate per period of a loan or investment. If you sold land for $11,933 that you bought 5 years ago for $5,000, what is your annual rate of return?

19%

NPER returns the number of periods for an investment based on periodic, constant payments and a constant interest rate. Suppose you placed $100 in an account that pays 9.6% interest, compounded monthly. How long will it take for your account to grow to $500?

201.98 months

Pmt

Any annuity payments (equal amounts of cash received)

Type

Cash flows at the end of period (0) or beginning of period (1)

Which of the following are ordinary annuities used for?

End of month savings (equal $) Home mortgages/auto notes Most capital budget projects for corporations

The value of an asset at a specific date is measured by calculating the nominal future sum of money that a given sum of money is "worth" at a specified time in the future. This is accomplished by calculating _____.

FV

On a project the _____ must exceed the cost of capital to add shareholder value and generate positive net present value (NPV).

IRR

The rate that makes the PV of net cash flows = zero NPV is

IRR

Which of the following are true regarding Net Present Value (NPV) decision rules?

If NPV is positive, accept If NPV is negative, reject

Rate

Interest rate per period

Which of the following are annuities due used for?

Life Insurance/homeowners insurance Most capital budget projects for corporations Apartment Rent

true statements about ordinary annuities.

Most of the time ordinary annuity payments are made monthly, quarterly, semiannually, or annually. Payments in an ordinary annuity can be made as often as every week. An ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time.

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is referred to as _____.

NPV

If you deposit money into an account for 5 years that pays interest quarterly you need to properly account for the ____________ and adjust the Rate (interest rate).

Nper

A financial function that returns the number of periods for loan or investment is called _____. You can use this calculation to get the number of payment periods for a loan, given the amount, the interest rate, and periodic payment amount.

Number of Periods (NPER)

Nper

Number of payment periods

What represents the benefits an individual, investor, or business misses out on when choosing one alternative over another?

Opportunity costs

Which of the following are used in an Interest Rate calculation?

PV = Present Value—The total amount a series of payments is worth now Pmt = Any annuity payments (equal amounts of cash received) FV = Future Value—A cash balance you want to attain after the last payment is made. If omitted, uses FV = 0 Nper = Number of payment periods Type

Also referred to as discounted value, _____ measures the worth of a future amount of money or stream of payments in today's dollars adjusted for interest and inflation.

Present value

Which principle of finance states that a dollar in your hand today is worth more than a dollar you will receive in the future because a dollar in hand today can be invested to turn into more money in the future?

TVM

Which of the following are the methods you can solve an annuity problem with uneven cash flows?

Take the PV of each cash flow and add up Use NPV function in Microsoft Excel

EFFECT returns the annual effective interest rate. We know that: $1,000 invested for one year at 10% - Annual compounding = $100.00 of interest and an effective interest rate of 10%. What happens if the number of compounding periods increased? For example, if the number of compounding periods is increased from annual compounding (1 period) to monthly (12 periods) compounding?

The effective interest rate increases

A contract between an individual and a company in which you make a lump sum payment or series of payments and, in return, receive regular disbursements beginning either immediately or more commonly at some point in the future is called an _____.

annuity

The interest rate that is actually earned or paid on an investment, loan or other financial instrument due to the result of compounding interest over a given time period is referred to as the ___________________. It is also called the effective interest rate, the effective rate, or the annual equivalent rate.

effective interest rate

In Microsoft Excel, the Financial Functions can be found under the _________________ tab in the Functions Library.

formulas

If we understand opportunity cost we can translate $1 in the future into its equivalent today by discounting using a "discount" or __________________ rate.

interest

The amount charged by a lender that a borrower must pay for using the lender's principal (money) is referred to as an ________. In other words, this is the extra amount beyond the premium (payment) that the borrower must repay the lender.

interest rate

The transfer of a good, service, or financial assets/instrument in exchange for another form of good, service, or financial assets/instrument that is agreed upon by all parties involved in the transaction is called a _____.

payment

In a Future Value calculation, if the Present Value (PV) is negative, the Future Value (FV) will be ______________________ or vice versa

positive

PV

present value