03 Time Value of Money

Question 1

PV

Answer 1

Present value

Question 2

FV

Answer 2

Future value

Question 3

NPER

Answer 3

Number of periods (e.g. 4 years)

Question 4

RATE

Answer 4

Interest rate (e.g. 5%)

Question 5

A dollar would be worth..

Answer 5

More today than a dollar in the future (due to price inflation)

Question 6

Time zero

Answer 6

Beginning of transaction in TVM

Question 7

Future value

Answer 7

What one or more cash flows are worth at the end of a specified period

Question 8

Principal

Answer 8

Initial investment

Question 9

Simple interest

Answer 9

Interest that gets paid on original principal

Question 10

Compound interest

Answer 10

Process by which interest earned on an investment is reinvested so that in future periods, interest is earned on the interest as well as the principal

Question 11

Interest

Answer 11

Compensation for holding onto (saving) money

Question 12

Compounding

Answer 12

Future value technique used to find the future value of each cash flow at the end of the project’s life.

Question 13

Time value of money refers to issue of..

Answer 13

what the value of the stream of future cash flows is today.

Question 14

Discounting

Answer 14

The present value technique used to find the present value of each cash flow at the beginning of the project.

Question 15

Which answers do you expect to be negative?

Answer 15

Excel requires a positive and negative number to balance the equation, PV equations would be negative because you are SAVING the money today to receive in the future (you are putting the money aside to save, it is an OUTFLOW, therefore it is negative).

Question 16

Impact of lower interest rate

Answer 16

Future value of investment would be LOWER as earning less interest over time. Present value of investment would be HIGHER as earning less interest over time.