Finance Part 2 Test 1

Question 1

Time Value Analysis

Answer 1

The use of time value of money techniques to value future cast flows, sometimes called discounted cash flow analysis

Question 2

Time Line

Answer 2

A graphical representation of time and cash flows, may be an actual line or cells on a spreadsheet

Question 3

Is an investment positive or negative on a number line?

Answer 3

Negative because you are losing the money

Question 4

Why is sign convention important in Time Value Analysis?

Answer 4

essential to show whether it is an inflow or outflow of money, positive or negative, inflow = positive

Question 5

Present Value

Answer 5

the beginning amount of an investment of a lump sum, an annuity, or a series of unequal cash flows

Question 6

Compounding

Answer 6

The process of finding the future value of a lump sum, an annuity, or series of unequal cash flows

Question 7

What is a lump sum?

Answer 7

type of compounding, there is a single starting point

Question 8

What is compounding?

Answer 8

process of finding the future value

Question 9

What is interest on interest?

Answer 9

compound interest, interest earned when interest payments are reinvested

Question 10

How does the Future Value of a lump sum change as the time extended and interest rate increases?

Answer 10

Time extended leads to FV increase

Interest Rate Increases leads to FV increases

Question 11

Discounting

Answer 11

the process of finding the PV of a lump sum, annuity, or a series of unequal cash flows

Question 12

How is Discounting related to Compounding?

Answer 12

its the reverse of compounding

Question 13

How does PV of a lump sum to be received in future change?

Answer 13

Time extended, longer the time, lower the PV

Interest Rate Increase, higher the rate, lower the PV

Question 14

Opportunity Cost

Answer 14

cost associated with alternative uses the same funds

Question 15

Example of Opportunity Cost

Answer 15

if money is used for one investment, it is no longer available for other uses

Question 16

Why does an investment have an opportunity cost?

Answer 16

the money could be used for another investment or use applies to all investments no matter what

Question 17

How are OC rates established?

Answer 17

the OC rate applied to an investment cash flow is the rate that could be earned on alternative investments of similar risk
the primary determinant is the riskiness of the cash flows being discounted

Question 18

Does the OC rate depend on the source of the investment funds?

Answer 18

No, it depends only on the riskiness of cash flows and returns available on alt investments of similar risk

Question 19

Future Value

Answer 19

later money on a time line

Question 20

Interest Rate

Answer 20

“exchange rate” between earlier and later money

also called discount rate, cost of capital, OC of capital, and required return

Question 21

FV formula

Answer 21

FV = PV (1+R)^T

Question 22

Future Value Int Factor

Answer 22

(1+R)^T

Question 23

PV Formula

Answer 23

PV = FV/(1+R)^T

Question 24

Simple Interest Formula

Answer 24

Money Amount + (Number of Periods)(Money Amt)(Int Rate)

Question 25

Examples of Financial Decisions that Typically involve uneven cash flows

Answer 25

the financial evaluation of a proposed outpatient clinic or MRI facility rarely involves constant cash flows

Question 26

How are PV of uneven cash flows found using a calculator?

Answer 26

Find the PV of each amt and then add them up

Question 27

How are PV of uneven cash flows found using excel?

Answer 27

=NPV (INT rate cell, Begin Amt:End Amt) | Amts go down, usually the first column

Question 28

What is meant by Net Present Value?

Answer 28

Function in excel, assumes that cash flows occur at the end of each period, calculated as of the beginning of the period of the first cash flow

Question 29

Annuity

Answer 29

includes the words "constant amt" payments are the same in each period a series of payments of a fixed amt for a specified number of equal periods

Question 30

What to use on excel to find NPER?

Answer 30

use it to solve for time

Question 31

What to use on excel to find RATE?

Answer 31

use it to solve for Interest rate

Question 32

What is the rule of 72?

Answer 32

(72)/(int rate) = years for money to double in value (72)/(years) = interest rate required to double money in an account simple and quick method for judging the effect of different interest rates on the growth of lump sum deposit

Question 33

Payment

Answer 33

PMT | in TVA, the dollar amt of an annuity cash flow

Question 34

Ordinary ( Regular ) Annuity

Answer 34

annuity with payments occurring at the end of each period

Question 35

Annuity Due

Answer 35

An annuity with payments occurring at the beginning of each period Future Value of Annuity Due = FV of an ordinary annuity x (1 + Int Rate)

Question 36

Which type of annuity has a greater Future Value?

Answer 36

Annuity due because it is compounded for one additional unit | Greater by 1+Int

Question 37

Which annuity has a greater PV?

Answer 37

Annuity Due is larger than that of a similar regular annuity, payments are shifted left, discount for 1 less year

Question 38

Perpetuity

Answer 38

an annuity that lasts forever (has no maturity date)

Question 39

Perpetuity Formula

Answer 39

PV(Perpetuity) = Payment / Interest Rate | PMT/I

Question 40

What happens to the val of a perpetuity when int rate increases or decreases?

Answer 40

When the rate increases, value decreases | When the rate decreases, value increases

Question 41

Rate Formula

Answer 41

R = (FV/PV)^1/T - 1

Question 42

Time Formula

Answer 42

T = ln(FV/PV) / ln(1+r)

Question 43

How to determine the T value when their are multi cash flows when FV?

Answer 43

You take the total number of years minus what year the cash flow was made

Question 44

How to determine the T value when their are multi cash flows when PV?

Answer 44

The T amount is what year is was when the cash flow was made

Question 45

What is the FV function on excel?

Answer 45

FV(int rate, t value, , negative cash flow)

Question 46

How to decided whether or not you should make the investment?

Answer 46

If the FV of the investment is less than the PV or what you invest, then you should not

Question 47

Future Value in One Year

Answer 47

principal plus interest | find the interest by taking the rate and multiplying it by the investment amt

Question 48

PV on excel

Answer 48

when calculating the FV | should be negative

Question 49

FV on excel

Answer 49

When calculating the PV | should be negative

Question 50

Rate on excel

Answer 50

PV should be negative | FV should be positive

Question 51

NPER on excel

Answer 51

PV should be negative | FV should be positive

Question 52

Perpetuity Formula

Answer 52

PV = C/r | C is PMT on excel

Question 53

Annuity Formula PV

Answer 53

C((1-(1/((1+r)^t)))/r)

Question 54

Annuity Formula FV

Answer 54

C(((1+r)^t - 1 ) / r )

Question 55

PV on excel formula of an annuity

Answer 55

=PV(rate,years,payments)

Question 56

FV on excel formula of an annuity

Answer 56

=-FV(rate, nper, pmt) | make sure that it's negative to make result positive

Question 57

PMT on excel

Answer 57

PMT(rate, nper, pv, fv) | if pmt is left negative, it shows that its a cash outflow

Question 58

NPER function on excel

Answer 58

NPER(rate, pmt, pv)

Question 59

Rate function on excel

Answer 59

RATE ( NPER, PMT, PV)

Question 60

Annuity due on excel

Answer 60

indicated by a 1 on type field