Chapter 11: Time Value of Money & Cost Benefit Analysis

Question 1

Time Value of Money (TVM)

Answer 1

Since money can earn interest under normal economic and financial circumstances, it is worth more the sooner it can be obtained

Question 2

Annuity

Answer 2

A fixed sum of money distributed on a regular basis, whether monthly, quarterly, yearly, or at some other regular interval

Question 3

Benefit-Cost Ratio (BCR)

Answer 3

Also known as cost-benefit ratio.
A measure of program efficiency; the ratio of the benefits of a project relative to its costs, all expressed in monetary terms

Question 4

Cost-Benefit Analysis (CBA)

Answer 4

A method of determining whether or not a certain project should be done. CBA involves finding and quantifying all the positive factors (benefits) and all the negative factors (costs) of a proposed action and determining the difference between them (the net) to decide whether or not the action is advisable.

Question 5

Discount Rate

Answer 5

The interest rate used to discount future cash flows to determine the present value of an investment

Question 6

Future Value

Answer 6

The value of cash or another type of asset at a future date that is equivalent in value to a specified sum now

Question 7

Interest Rate

Answer 7

The percentage rate at which interest is charged on a loan for a period

Question 8

Internal Rate of Return (IRR)

Answer 8

A measurement of the return on an investment. The IRR is the discount rate at which a project’s net present value equals zero.

Question 9

Net Present Value (NPV)

Answer 9

The difference between cash inflows and cash outflows, both discounted to their present values.

Question 10

Present Value

Answer 10

The value of cash or another type of asset on a given date of a future payment or series of future payments; discounted to reflect the time value of money

Question 11

Simple Interest Rate Method

Answer 11

Adds interest to the principal at the end of each period. Interest is calculated on principal only. Uncommon method.

Question 12

Compound Interest Rate Method

Answer 12

Interest is earned on the principal + interest accumulated in previous investment periods.
FV = pv * (1+i)^n
FV = Future Value
pv = principal/present value of investment
i = interest rate
n = number of compounding time periods

Question 13

Annuity Future Value

calculation

Answer 13

FV = PMT [((1+i)^n - 1)/i]
FV = Future Value
PMT = amount of payment or receipt
i = interest rate
n = the number of compounding time periods

Question 14

Annuity Present Value

calculation

Answer 14

PV = PMT [(1-1/(1+i)^n)/i]
FV = Future Value
PMT = amount of payment or receipt
i = interest rate
n = the number of compounding time periods

Question 15

Net Present Value (NPV)

definition

Answer 15

Difference between cash inflows and cash outflows, both discounted to their present values
If NPV > 0, project/investment creates value (accept)
If NPV = 0, then project/investment neither creates nor destroys value
If NPV < 0, project/investment destroys value (reject)

Question 16

Net Present Value (NPV)

calculation

Answer 16

NPV = n sum t=0 * [(bt - ct)/((1+t)^t)]
b = cash inflows
c = cash outflows
i = discount rate
t = time period 
n = number of time periods

Question 17

Ex Ante Analysis (CBA)

Answer 17

Takes place before project is implemented. Allows analyst to investigate/compare potential alternatives of programs to advise decision-making.

Question 18

Ex Post Analysis (CBA)

Answer 18

Takes place after the project is implemented. Assesses efficiency of the program. Used for accountability auditing, to be used for decision making for future programs & investments.

Question 19

CBA Steps (8)

Answer 19

1. Determining standing and perspectives
2. Determining alternatives or basis for comparison
3. Listing impacts
4. Monetizing impacts, including costs and benefits
5. Discounting future impacts
6. Calculating & using net present value as decision rule
7. Performing sensitivity analysis
8. Selecting alternative with largest net social benefits

Question 20

Social Cost Benefit Analysis (CBA)

Answer 20

Interests of all people in the jurisdiction are taken into consideration

Question 21

Determining “standing”

Answer 21

Determining whose interest counts. Usually determined by the project sponsor, and the nonprofit that provides the services.

Question 22

Status Quo

Answer 22

The existing situation or program, used as a baseline comparison to a potential different use of funds