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You are on page 1of 112

Time

Value

of

Money

Learning

Goal

1: Discuss

the

role

of

time

value

in

finance,

the

use

of

computational

tools,

and

the

basic

patterns

of

cash

flow.

4.1.1) Since

individuals

are

always

confronted

with

opportunities

to

earn

positive

rates

of

return

on

their

funds,

the

timing

of

cash

flows

does

not

have

any

significant

economic

consequences.

of

Time

Value

in

Finance

4.1.2) Time -

value

of

money

is

based

on

the

belief

that

dollar

that

will

be

received

at

some

future

date

is

worth

more

than

dollar

today.

of

Time

Value

in

Finance

4.1.3) Future

value

is

the

value

of

future

amount

at

the

present

time,

found

by

applying

compound

interest

over

specified

period

of

time.

Value

4.1.4) Interest

earned

on

given

deposit

that

has

become

part

of

the

principal

at

the

end

of

specified

period

is

called

compound

interest.

Interest

4.1.5) In

future

value

or

present

value

problems,

unless

stated

otherwise,

cash

flows

are

assumed

to

be

A) at

the

end

of

time

period.

B) at

the

beginning

of

time

period.

C) in

the

middle

of

time

period.

D) spread

out

evenly

over

time

period.

Time

Value

Concepts

Learning

Goal

2: Understand

the

concepts

of

future

value

and

present

value,

their

calculation

for

single

amounts,

and

the

relationship

between

them.

4.2.1) The

future

value

interest

factor

is

the

future

value

of

$1

per

period

compounded

at

percent

for

periods.

Value

4.2.2) For

given

positive

interest

rate,

the

future

value

of

$100

increases

with

the

passage

of

time.

Thus,

the

longer

the

period

of

time,

the

greater

the

future

value.

Value

Chapter

Time

Value

of

Money

127

4.2.3) The

greater

the

interest

rate

and

the

longer

the

period

of

time,

the

higher

the

present

value.

Value

4.2.4) Everything

else

being

equal,

the

higher

the

interest

rate,

the

higher

the

future

value.

Value

4.2.5) Future

value

increases

with

increases

in

the

interest

rate

or

the

period

of

time

funds

are

left

on

deposit.

Value

4.2.6) Everything

else

being

equal,

the

higher

the

discount

rate,

the

higher

the

present

value.

Value

4.2.7) Everything

else

being

equal,

the

longer

the

period

of

time,

the

lower

the

present

value.

Value

4.2.8) The

present

value

interest

factor

for

percent

and

periods

is

the

inverse

of

the

future

value

interest

factor

for

percent

and

periods.

Value

4.2.9) Given

discount

rate

of

zero

percent

and

periods

of

time,

the

present -

value

interest

factor

and

future

value

interest

factor

are

equal.

Value

4.2.10) When

the

amount

earned

on

deposit

has

become

part

of

the

principal

at

the

end

of

specified

time

period

the

concept

is

called

A) discount

interest.

B) compound

interest.

C) primary

interest.

D) future

value.

Time

Value

Concepts

4.2.11) For

positive

interest

rates,

the

future

value

interest

factor

is

A) always

greater

than

1.0.

B) sometimes

negative.

C) always

less

than

0.

D) never

greater

than

25.

Value

(Equation

4.5)

128

Gitman

Principles

of

Managerial

Finance

12e

4.2.12) The

future

value

of

$100

received

today

and

deposited

at

percent

for

four

years

is

A) $126.

B) $

79.

C) $124.

D) $116.

Value

(Equation

4.4,

4.5,

and

4.6)

4.2.13) If

the

interest

rate

is

zero,

the

future

value

interest

factor

equals

________.

A) -

1.0

B) 0.0

C) 1.0

D) 2.0

Value

(Equation

4.5)

4.2.14) As

the

interest

rate

increases

for

any

given

period,

the

future

value

interest

factor

will

A) decrease.

B) increase.

C) remain

unchanged.

D) move

toward

1.

Value

(Equation

4.5)

4.2.15) The

future

value

of

$200

received

today

and

deposited

at

percent

for

three

years

is

A) $248.

B) $252.

C) $158.

D) $200.

Value

(Equation

4.4,

4.5,

and

4.6)

4.2.16) The

present

value

of

$100

to

be

received

10

years

from

today,

assuming

an

opportunity

cost

of

percent,

is

A) $236.

B) $699.

C) $

42.

D) $

75.

Value

(Equation

4.9,

4.11,

4.12)

4.2.17) The

amount

of

money

that

would

have

to

be

invested

today

at

given

interest

rate

over

specified

period

in

order

to

equal

future

amount

is

called

A) future

value.

B) present

value.

C) future

value

interest

factor.

D) present

value

interest

factor.

Value

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