Time Value of Money Module

Question 1

It is important to understand the role that time value plays in making financial decisions in the short and long term so that future revenues and cash flow can be analyzed in today’s _______.

Answer 1

dollars.

• We operate in the present time, therefore it is crucial to be able to translate the impact of current and future financial decisions in terms of the dollar’s current value.

Question 2

Time value calculations can be made using the ___ ____ or present value techniques.

Answer 2

future value.

• The amount of cash at a particular date in the future that is equivalent in value to a specified sum today.

Question 3

The present value technique refers to the current value of one or more future cash payments, discounted at a specific __________ rate.

Answer 3

interest.

• Present value relates to a sequence of future cash flows expressed in today’s dollars and therefore discounting has to take place in order to account for the present value.

Question 4

Financial managers tend to prefer the _____ value technique because they make decisions at the start of the project.

Answer 4

present.

• Since the present value technique measure values at the start of the project time zero, these tend to be preferred.

Question 5

A timeline is a horizontal line that has the present time and value on the far left hand corner and future periods and value are displayed as you move towards the ________.

Answer 5

right. This is the graphical representation of time value:

Question 6

Money has a time value and therefore a dollar is worth more now than later, even after adjustment for inflation, because the dollar received now can ________ in value until the time the dollar in the future would be received.

Answer 6

appreciate.

A dollar received now can be invested and appreciate in value whereas a dollar received at a future time will not be given this opportunity. Please see the graph for a pictorial example.

Question 7

There are three computational aids that can be used in order to calculate present and future values and these are financial ____________, handheld business and financial calculators and personal computers.

Answer 7

tables.

• These calculations are complex and require these aids.

Question 8

The general structure of a financial table consist of two rows displaying the ____ ______ and interest rate.

Answer 8

time period.

• In order to ascertain the future or present value of money, time and the interest rate are the two key factors required.

Question 9

To calculate the ______ value of a single amount, interest is compounded on the principal sum over a particular period.

Question 10

The effect that interest has on an amount of money when the interest rate is applied to both the initial sum invested as well as the interest that has already been received on that sum is called _____________.

Answer 10

compounding.

• This is the definition of compounding. For example A invests $100 at 10% interest per year. Assume the interest stays fixed over a 2 year period. After Year 1, interest earned is $10 ($100 x 10%). That is added on to the prinicipal sum of money invested to make a total of $110 ($100 + $10). In year 2 interest earned is $11 ($110 x 10%). The total is now $121($110+$11).

Question 11

The principal is the amount of money on which ________ is calculated and paid.

Answer 11

interest.

• Interest is owed on a loan and the principal is the amount borrowed.