Ch3/4 Financial Mathematics (1)

Question 1

Valuing Decisions

Answer 1

Every decision has future consequences that will affect the firm

Question 2

Competitive Market

Answer 2

A market in which goods can be bought and sold at the same price (price determines the value of the good)

Question 3

Valuation Principle

Answer 3

Value of a commodity is determined by its competitive market price (when value of benefits > costs = increase market value of the firm)

Question 4

Time Value of Money

Answer 4

Recognizing the value of cash receipt depends not on only how much money you receive but also on when you receive it.

The value of $ today = more than a future $
= money that you have right now can be invested and earn a return, thus creating a larger amount of money in the future. Also, money erodes in value due to inflation.

Question 5

General Rules (3)

Answer 5

1. Only values at the same point in time can be compared
2. to move cash flow forward in time it must be compounded
3. to move cash flow back in time it must be discounted