time value of money

1. Time Value of Money explains how much money you need to (a) today so that your
(b) will earn in the (c). The timing of decision involves a gap between the time when
(d) are borne and (e) received.
a: invest, b: investment, c: future, d: costs, e: benefits
2. (a) can be used by managers in order to properly account for the timing of receipts
and expenditures.
a: Present Value Analysis
3. The amount that would have to be invested today at the prevailing interest rate to
generate the given future value is called (a).
a: Present value of a single future value
4. Formula for Present value of a single future value.

5. Cumulative present value of future cash flows is called (a).

a: Present value of a stream of future values
6. Formula for Present value of a stream of future values

7. The Present Value of an income stream generated by a project minus the current
costs of said project is called (a).
a: Net Present Value of a Project (NPV)
8. Formula for Net Present Value of a Project (NPV).

where OCW = Opportunity cost of waiting.

 9. The value of decisions which generate cash flows that continue indefinitely is
described by (a).
a: Present value of Indefinitely Lived Assets
10. Formula for Present value of Indefinitely Lived Assets.

where CF = Cash Flow, i = interest rate

11. (a) is the present value of the firm’s current and future profits generated by its
assets.
a: Present value of a firm
12. The Present Value of a Firm takes the short-term impact of managerial decisions
on profits. True?
False. It takes the long-term impacts of decisions on profits.
13. Formula for the Present value of a Firm.

where g = growth rate

marginal analysis
14. meaning of B(Q)
- total benefit
15. meaning of C(Q)
- total cost
16. manager’s objective is to maximize net benefits. true?
- true
17. formula for net benefits.
- N(Q) = B(Q) - C(Q)
18. explain the marginal principle
- to maximize net benefits, manager should increase control variable ‘Q’ up to the
point where marginal benefits equal marginal costs
19. meaning of MB(Q)
- marginal benefit: change in total benefits arising from change in the control
variable
20. meaning of MC(Q)
- marginal cost: change in total costs arising from change in the control variable
21. formula for marginal net benefits.
- MNB(Q) = MB(Q) - MC(Q)