Chapter 5 SmartBook

Question 1

Why is a dollar received today worth more than a dollar received in the future?

Answer 1

Today’s dollar can be reinvested, yielding a greater amount in the future.

Question 2

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

Answer 2

Cash

Question 3

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

Answer 3

(1 + r)

Question 4

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

Answer 4

$121.00
FV = $100 x 1.10^2 = $121

Question 5

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

Answer 5

Compounding

Question 6

A dollar received one year from today has _____ value than a dollar received today.

Answer 6

Less

Question 7

1. ______ value is the cash value of an investment at some time in the 2. ______

Answer 7

1. Future
2. future

Question 8

In general, if you invest for one period at an interest rate of r, your investment will grow to 1 (minus/plus) r.

Answer 8

Plus

Question 9

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 ____.

Answer 9

$600; $605

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.

Question 10

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

Answer 10

$133.10

Question 11

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

Answer 11

Compounding

Question 12

Interest earned on the original amount invested is called _______.

Answer 12

simple interest

Question 13

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

Answer 13

False

Question 14

The greater the number of time periods, the ________
(smaller/greater) the impact of compounding.

Answer 14

Greater

Question 15

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

True or False

Answer 15

True

Question 16

The ______ (smaller/greater) the interest rate changes, the greater the impact to the future value of an amount invested.

Answer 16

Greater

Question 17

The correct future value interest factor in a time value of money table for $1 in 10 years at 10 percent per year is 2.5937.

Answer 17

True

Question 18

Which of the following is the correct mathematical formula for the calculation of the future value of $100 invested today for 3 years at 10% per year?

Answer 18

FV= $100 x (1.10)^3

Question 19

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

Answer 19

Investment B

Question 20

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

True
False

Answer 20

False

Question 21

Small changes 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.

True
False

Answer 21

False

Question 22

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

Answer 22

The same

Question 23

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

Answer 23

1.21

Question 24

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.

Answer 24

Present

Question 25

Discounting is the opposite of ________

Answer 25

Compounding

Question 26

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

Answer 26

False

Question 27

Which of the following methods can be used to calculate present value? A. An algebraic formula B. A financial calculator C. A time value of money table D. Random number generation

Answer 27

A, B and C

Question 28

What is the future value of $1,000 invested for 8 years at 6%?

Answer 28

$1,593.85

Question 29

Which formula below represents a present value factor?

Answer 29

1/(1+r)^t

Question 30

Which of the following can be determined using the future value approach to compound growth developed in this chapter? A. Dividend growth B. Erratic growth C. Sales growth

Answer 30

A and C

Question 31

Calculating the present value of a future cash flow to determine its value today is called _____.

Answer 31

Discounted cash flow valuation

Question 32

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

Answer 32

Present

Question 33

All else equal, the longer time period you have before you will need the money, the _______ (less/more) you will need to deposit today to have the same amount in the future.

Answer 33

Less

Question 34

The equation that results in the Blank______ value interest factor for a single deposit is as follows: 1(1+r)t

Answer 34

Present

Question 35

If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value.

Answer 35

Present value factor

Question 36

The basic present value equation underlies many of the _____.

Answer 36

Most important ideas in corporate finance

Question 37

The discount rate is also called the rate of _____

Answer 37

Return

Question 38

The _____ rate is the rate used to calculate the present value of the future cash flows.

Answer 38

Discount

Question 39

Which of the following are correct spreadsheet functions?

Answer 39

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

Question 40

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?

Answer 40

10-year investment

Question 41

The equation that results in the Blank______ value interest factor for a single deposit is as follows: (1 + r)t

Answer 41

Future

Question 42

The basic present value equation is: PV = FVt(1+r)t PV × FVt = (1 + r)t FV = PVt(1+r)t

Answer 42

A

Question 43

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?

Answer 43

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

Question 44

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) =N(40,0.0653,−240) =N(0.0653,0,−40,240) =NPER(0,0.0653,−40,240)

Answer 44

A