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Exam 10: Time-Value-Of-Money Concept

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Question 1

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How is the future value of an annuity calculated?

A) by adding the annuity factor to the even series of receipts
B) by multiplying the annuity factor by the even series of receipts
C) by multiplying the annuity factor by an uneven series of receipts
D) by dividing the annuity factor by an uneven series of receipts

E) A) and C)
F) A) and D)

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Question 2

True/False

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Cash outflow represents the receipt of money generated by revenue less expenses.

A) True
B) False

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False

Question 3

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To calculate the present value of a series of even receipts, one can use the annuity tables.

To find the net present value, one has to find the present value of the future cash inflows less the initial cash outflow.

In capital budgeting decisions, the internal rate of return of a project should be more than the weighted average cost of capital.

Match the words with the term. -net present value

Match the words with the term. -cash outflow

Use the interest tables contained at the end of the textbook and/or a financial calculator to do the following exercises. An entrepreneur would like to invest $200,000 in a project that would generate, for each year during the next ten years: (a) $140,000 in gross profit, (b) $90,000 in profit before taxes, and (c) $40,000 in net profit for the year. The accountant informed the entrepreneur that the statement of income includes an amount of $10,000. The investment in working capital during the first year of operation would be $60,000. During the last year, he would want to sell the business for $500,000. -The project's internal rate of return is _________________________.

Match the words with the term. -future value of a single sum

Match the words with the term. -present value factor

Use the interest tables contained at the end of the textbook and/or a financial calculator to do the following exercises. If you receive an inheritance in the amount of $150,000 today or $25,000 each year, calculate the future value of both options by the end of the tenth year. Assume a 10% interest rate. -Today's value of both options are: Option 1: _______________________. Option 2: _______________________.

A person deposits $100,000 in investment securities bearing a 14% compound interest rate Note: Use the interest tables contained at the end of the textbook and/or a financial calculator to do the following exercises -If you invest $20,000 at 10%, how much would your investment have accumulated at the end of 5 years?

Money has a time value because of the existence of _____________________________.

Future value means the amount to which a payment or series of payments will grow by a given future date when compounded by a given interest rate.

What does the formula FVn = P(1+i) n calculate?

Match the words with the term. -fixed amounts over a period of time

The amount to which a payment will grow by a given future date is calculated by using ____________________ interest tables.

The algebraic formulas used to calculate future and present values contain symbols and letters in which FV stands for ____________________ of the principal or a sum.

When using time value of money yardsticks, ____________________ flow and NOT profit for the year is used in the calculation.

The algebraic formulas for interest tables are made up of symbols and letters. The symbol "FV" means "future value".