Time Value of Money

Question 1

Why is a dollar today worth more than a dollar in the future?

Answer 1

inflation, interest, earning potential

Question 2

Interest

Answer 2

the cost of borrowing money

Question 3

2 types of interest

Answer 3

simple and compound

Question 4

Principal

Answer 4

the amount of money involved in the debt or investement

Question 5

Invested Capital

Answer 5

the amount of money invested into a company, project, or asset

Question 6

Interest Rate

Answer 6

the cost of money expressed as a percent over time

Question 7

Interest Period

Answer 7

the frequency that interest is calculated

Question 8

Duration/Length

Answer 8

the period of time that the loan/investment applies

Question 9

Receipt

Answer 9

positive cash flow over a length of time (income)

Question 10

Disbursements

Answer 10

negative cash flow over a length of time (expenses)

Question 11

Present Value

Answer 11

the amount that a future sum of money of worth today due to rate of return

Question 12

Total Interest

Answer 12

the total amount of money earned/paid over a period of time due to interest

Question 13

Simple Interest

Answer 13

interest is earned only on the principal amount during each interest period

Question 14

Compound Interest

Answer 14

interest is earned on the principal and accumulated interest each interest period

Question 15

Factors affecting Interest Rate

Answer 15

Inflation and risk

Question 16

Inflation

Answer 16

the change in purchasing power of a dollar

Question 17

Risk

Answer 17

the potential that the income will not be achieved; a debt not repaid

Question 18

Cash Flow Diagram

Answer 18

graphical representation of the key elements of the problem

Question 19

4 Key Principals of Economic Equivalence

Answer 19

1. When comparing alternatives, they must have the same time basis
2. Equivalence depends on interest rate
3. May require the conversion of multiple cash flows to a single cash flow
4. Equivalence is maintained regardless of point of view

Question 20

What does the time value of money depend on?

Answer 20

purchasing power and earning potential

Question 21

5 Basic Types of Cash Flow

Answer 21

1. Single cash flow
2. Uniform series
3. Linear-gradient series
4. Geometric-gradient series
5. Irregular series

Question 22

Single Cash Flow

Answer 22

a single transaction at one point in time

Question 23

Rules of 72

Answer 23

N=72/i; calculates the amount of time for money to double by an interest rate (i)

Question 24

Uniform Series

Answer 24

same amount of money transacted over 2 or more periods

Question 25

Deferred Annuity

Answer 25

an equal series cash flow that starts later than one interest period in the future

Question 26

Linear-Gradient Series

Answer 26

transactions increase or decrease by a constant amount

Question 27

Geometric-Gradient Series

Answer 27

transaction increase or decrease by a constant rate

Question 28

Irregular Series

Answer 28

random transactions