Question 1

You are scheduled to receive $10,000 in one year.An increase in the interest rate will have what effect on the future value of this cash flow?

Accepted Answer

The future value of a cash flow that is already set to be received in the future does not change with interest rate fluctuations. The interest rate affects the present value or the cost of obtaining that future cash flow today, not the amount of the cash flow itself when it is already determined for a future date.

Question 2

The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.

Accepted Answer

The rule of 72 is a commonly used formula to estimate the time it takes for an investment to double in value, based on the annual rate of return. The formula is 72 divided by the annual interest rate, and the result is the approximate number of years it will take for the investment to double. For example, if the annual interest rate is 6%, it will take approximately 12 years (72 divided by 6) for the investment to double in value.

Question 3

How can we take a financial decision with cash flows occurring at different points in time?

Accepted Answer

The answer of How can we take a financial decision...

Question 4

To calculate a cash flow's present value (PV),you must compound it.

Accepted Answer

To calculate a cash flow's present value, you discount it back to the present time, rather than compounding it. Compounding is used for calculating future values.

Question 5

What is the future value (FV)of $10,000 in 50 years,assuming the interest rate is 4% per year?

Accepted Answer

E) Calculate the FV with PV = $10,000, interest = 4%, and N = 50, FV = $71,067

Question 6

What is the present value (PV)of $66,000 received 7 years from now,assuming the interest rate is 9% per year?

Accepted Answer

D) Calculate the PV with FV = $66,000, interest = 9%, and N =7, PV = $36,104

Question 7

If money is invested at 8% per year,after approximately how many years will the interest earned be equal to the original investment?

Accepted Answer

C) Calculate the N using the rule of 72.

Question 8

If the interest rate is 5%,the one-year discount factor is equal to:

Accepted Answer

C) 1/(1.05) = 0.952

Question 9

If $1 million is invested at 6% per year,in approximately how many years will the investment double?

Accepted Answer

B) Calculate the N with FV = $2 million, PV = $1 million, and interest = 6%, N = 11.9

Question 10

You are scheduled to receive $10,000 in one year.An decrease in the interest rate will have what effect on the present value of this cash flow?

Accepted Answer

A decrease in the interest rate increases the present value of future cash flows because the discount factor (which is inversely related to the interest rate) becomes larger, making the present value of the cash flow higher.

Question 11

Explain why a dollar today is worth more than a dollar tomorrow.

Accepted Answer

The answer of Explain why a dollar today is worth...

Question 12

If the future value (FV)in two years of $100,000 invested in a certain fund that compounds it at a fixed rate annually is $116,640,at what rate has it been compounded?

Accepted Answer

A) Calculate the interest with FV = $116,640, PV = $100,000, and N = 2, which = 8%.

Question 13

Jeff has the opportunity to receive lump-sum payments either now or in the future.Which of the following opportunities is the best,given that the interest rate is 7% per year?

Accepted Answer

C) It has the highest Present Value. Calculate with FV = $1500, and interest = 7%, and number of years = 5, which gives PV = $1,069.479.

Question 14

Michelle is saving for a new car.She wants to have $25,000 in her account in 3 years.If her account pays 11% interest,how much money will she need to put in her account now,to ensure that she has $25,000 in 3 years?

Accepted Answer

A) Calculate the PV with FV = $25000, N =3, and interest = 11%, PV = 18,280

Question 15

What is the future value (FV)of $72,000 in 25 years,assuming the interest rate is 5.5% per year?

Accepted Answer

B) Calculate the FV with PV = $72,000, interest = 5.5%, and N = 25, FV = $274,564

Question 16

A dollar today and a dollar in one year may be considered to be equivalent.

Accepted Answer

Due to inflation, the purchasing power of a dollar decreases over time. Therefore, a dollar today is worth more than a dollar in one year.

Question 17

What is the future value (FV)of $100 in 30 years,assuming the interest rate is 8% per year?

Accepted Answer

D) Calculate the FV with PV = $100, interest = 8%, and N = 30, FV = $1,006

Question 18

What is the present value (PV)of $85,000 received 15 years from now,assuming the interest rate is 3% per year?

Accepted Answer

A) Calculate the PV with FV = $85,000, interest = 3%, and N =15, PV = $54,558

Question 19

If the one-year discount factor is equal to 0.90909,the interest must be equal to:

Accepted Answer

D) 1/(1 + r) = 0.90909
1 = (1 + r) × 0.90909
1 = 0.90909 + 0.90909r
1 - 0.90909 = 0.90909r
0.09091 = 0.90909r
r = 0.09091/0.90909 = .10 = 10%

Question 20

What is the present value (PV)of $1 million received 100 years from now,assuming the interest rate is 5% per year?

Accepted Answer

B) Calculate the PV with FV = $1,000,000, interest = 5%, and N =100, PV = $7,604

Quiz 3: The Valuation Principle: the Foundation of Financial Decision Making

You are scheduled to receive $10,000 in one year.An increase in the interest rate will have what effect on the future value of this cash flow?

The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.

How can we take a financial decision with cash flows occurring at different points in time?

To calculate a cash flow's present value (PV),you must compound it.

What is the future value (FV) of $10,000 in 50 years,assuming the interest rate is 4% per year?

What is the present value (PV) of $66,000 received 7 years from now,assuming the interest rate is 9% per year?

If money is invested at 8% per year,after approximately how many years will the interest earned be equal to the original investment?

If the interest rate is 5%,the one-year discount factor is equal to:

If $1 million is invested at 6% per year,in approximately how many years will the investment double?

You are scheduled to receive $10,000 in one year.An decrease in the interest rate will have what effect on the present value of this cash flow?

Explain why a dollar today is worth more than a dollar tomorrow.

If the future value (FV) in two years of $100,000 invested in a certain fund that compounds it at a fixed rate annually is $116,640,at what rate has it been compounded?

Jeff has the opportunity to receive lump-sum payments either now or in the future.Which of the following opportunities is the best,given that the interest rate is 7% per year?

Michelle is saving for a new car.She wants to have $25,000 in her account in 3 years.If her account pays 11% interest,how much money will she need to put in her account now,to ensure that she has $25,000 in 3 years?

What is the future value (FV) of $72,000 in 25 years,assuming the interest rate is 5.5% per year?

A dollar today and a dollar in one year may be considered to be equivalent.

What is the future value (FV) of $100 in 30 years,assuming the interest rate is 8% per year?

What is the present value (PV) of $85,000 received 15 years from now,assuming the interest rate is 3% per year?

If the one-year discount factor is equal to 0.90909,the interest must be equal to:

What is the present value (PV) of $1 million received 100 years from now,assuming the interest rate is 5% per year?