Time Value of Money

Question 1

Net Present Value Decision Rule

Answer 1

positive = Accept 
Negative = Deny

Question 2

Net Present Value Formula

Answer 2

NPV(I,io, {CF1,CF2, etc}, {CF1 Occurance, CF2 Occurance…}

Question 3

Profitability index

Answer 3

Expressed as a percentage

Formula = NPV (where io=0)/ io

Question 4

Profitability Rule

Answer 4

PI > 1 Accept

PI < 1 Reject

Question 5

Internal Rate of Return

Answer 5

= IRR(io, {CF1,CF2, etc}, {CF1 Occurance, CF2 Occurance…}

Question 6

Internal Rate of Return Rule

Answer 6

IRR > or = to Rate of Return = Accept

IRR < Rate of return = Reject

Question 7

Preferred Stock Valuation

Answer 7

Vps = Dividend (fixed) / Discount Rate

Question 8

Common Stock Valuation Base model

Answer 8

CSvalue = Dividend (time 1) / RoR-Growth Rate

Question 9

Effective yield discounting/compounding

Answer 9

Set PV to 100 and calculate compounded to 1 year

Question 10

Three Criteria necessary for capital Evalutaion

Answer 10

Examines all net cash flows,
Considers the time value of money, and
Considers risk using the required rate of return

Question 11

The value of Assets

Answer 11

in general, the value of any asset is equal to the present value of the stream of expected cash flows discounted at an appropriate required rate of return.