Deck 10: Time-Value-Of-Money Concept

Question 1

What gives money a time value?

A) cash flow
B) inflation
C) interest
D) risk

Answer 1

interest

Question 2

What does the term the time value of money mean?

A) The value of money is traded off as a function of time and risk.
B) The value of money is determined by the timing of a cash inflow.
C) The value of money is traded of as a function of time.
D) The value of money is determined by the timing of a cash outflows.

Answer 2

The value of money is traded of as a function of time.

Question 3

Which of the following is a typical cash outflow?

A) investment
B) depreciation plus receipts
C) receipts
D) profit for the year plus depreciation

Answer 3

investment

Question 4

How is cash inflow calculated?

A) by adding depreciation to profit for the year
B) by subtracting income taxes from profit for the year
C) by adding depreciation to profit before taxes
D) by adding the cash inflow to profit for the year

Question 5

What does inflation represent?

A) a discount value
B) the level of expectations that something will happen in the future
C) a price-rise characteristic
D) the time value of money

Question 6

What represents the receipt of money generated by revenue less cash expenses?

A) profit before taxes plus depreciation
B) cash inflow
C) cash outflow
D) cash inflow plus depreciation

Question 7

What tables are used to calculate the future value?

A) simple interest tables
B) algebraic interest tables
C) compound interest tables
D) discount interest tables

Question 8

What two key concepts are involved in investment decisions?

A) receipts and cash inflow
B) disbursements and cash outflow
C) net cash inflow and net cash receipts
D) time value and cash

Question 9

What term refers to a constant flow of money received or paid out over a given time period?

A) a net cash flow
B) an annuity
C) a receipt
D) an investment

Question 10

What does the rule of 72 show as an approximate number of years?

A) the time to double when compounded annually
B) the time to double when compounded semi-annually
C) the time to double when compounded monthly
D) the time to triple when compounded annually

Question 11

What is the amount to which a payment or series of payments will grow by a given future date when compounded by a given interest rate?

A) the future value
B) the net present value
C) the net future value
D) the net compounded value

Question 12

What term refers to the process of finding the present value of a series of future cash flows?

A) compounding
B) adding
C) subtracting
D) discounting

Question 13

What is the definition of an annuity?

A) a series of payments (or receipts) of an even amount for a period of one year only
B) an uneven series of payments (or receipts) for an unspecified number of years
C) a series of payments (or receipts) of uneven amount for a specified number of years
D) a series of payments (or receipts) of an even amount for a specified number of years

Question 14

What type of interest is applied to determine the future value of an investment?

A) future interest
B) discount interest
C) compound interest
D) simple interest

Question 15

What calculation determines the approximate number of years for an investment to double at a 10% interest compounded annually?

A) dividing this figure by 72
B) adding this figure to 72
C) dividing this figure into 72
D) subtracting this figure from 72

Question 16

What does the formula FVn = P(1+i) n calculate?

A) the present value of a single sum
B) the future value of an annuity
C) the present value of an annuity
D) the future value of a single sum

Question 17

Which number is a typical interest factor used to calculate the future value of an annuity?

A) +0.23
B) 0.231
C) 0.445
D) 6.105

Question 18

How is the future value of an annuity calculated?

A) by adding the annuity factor to the even series of receipts
B) by multiplying the annuity factor by the even series of receipts
C) by multiplying the annuity factor by an uneven series of receipts
D) by dividing the annuity factor by an uneven series of receipts

Question 19

What is the approximate future value of $1,000 compounded at 10% interest (end of period) over a three-year period?

A) +$990
B) + $ 1,100
C) + $ 1,150
D) + $ 1,330

Question 20

What is the present value of a $1,000 investment made in year 0 if the interest is at 10%?

A) - $ 1,000
B) +$ 900
C) + $ 1,000
D) + $ 1,100

Question 21

What is the present value of $ 1,000 received one year from now bearing interest at 10%?

A) -$ 1,000
B) -$ 909
C) +$ 500
D) +$ 909

Question 22

What is the net present value if the present value of the savings is $ 600 and the original investment is $ 1,000?

A) -$600
B) -$400
C) +$400
D) +$600

Question 23

Which of the following is NOT considered in capital budgeting decisions?

A) the time value of money
B) sunk costs
C) inflation
D) risk

Question 24

What do interest tables NOT include?

A) the future value of an annuity (compounding)
B) the present value of an annuity (discounting)
C) the present value of a future value (simple interest)
D) the future value of a single sum (compounding)

Question 25

Which of the following elements is NOT required to calculate the return on investment by using time-value-of-money yardsticks?

A) the expected life
B) the profit for the year
C) the cost of money
D) the annual cash inflows

Question 26

In which interest table are the factors 1.100 and 1.685 found?

A) the present value of an annuity table
B) the future value of a single sum table
C) the present value of a series of receipts table
D) the present value of a single sum table

Question 27

In which interest table is the factor 0.9090 found?

A) the future value of an annuity table
B) the present value of a single sum table
C) the future value of a series of receipts table
D) the future value of a single sum table

Question 28

Within the concept of capital budgeting decisions, which of the following statements is true?

A) expected life and salvage value can be ignored
B) risk is easily evaluated and calculated
C) cash outflows and cash inflows should be taken into consideration
D) inflation and time value of money can be ignored

Question 29

A company uses annuity tables to calculate the present or future value of a series. What is the nature of the amounts?

A) They are even amounts for a specified number of years.
B) They are even amounts for only one year.
C) They are uneven amounts for a specified number of years.
D) They are fixed amounts for only one year.

Question 30

Which of the following is a time-value-of-money yardstick?

A) the accounting rate of return (ARR)
B) the break-even analysis (BEA)
C) the net present value (NPV)
D) the earnings per share (EPS)

Question 31

What yields the largest value?

A) the net present value of an annuity of $1
B) the present value of an annuity of $1
C) the present value of a single sum of $1
D) the future value of an annuity of $1

Question 32

What is required to calculate the net present value?

A) the undiscounted cash inflow and the cash outflow
B) the discounted cash inflow and the cash outflow
C) the compounded cash inflow and the future cash flow
D) the cash inflow and the discounted cash outflow

Question 33

What is the internal rate of return?

A) the discount factor that makes the NPV negative
B) the discount factor that makes the discounted cash inflow equal to the future cash outflow
C) the discount factor that makes the NPV equal zero
D) the discount factor that makes the NPV positive

Question 34

What should the IRR exceed for a capital project to be favourable?

A) the return on assets
B) the weighted average cost of equity
C) the weighted average cost of debt
D) the weighted average cost of capital

Question 35

What must the NPV be for a capital project to be favourable?

A) negative
B) more than the IRR
C) positive
D) more than the return on assets

Question 36

When does the cash outflow usually take place for a capital project?

A) at year zero when the payout is made
B) during the first year of operation
C) during the second year of operation when the payout is earned
D) during the last year when the payout is made

Question 37

Which of these features is NOT found in an RRSP?

A) a liability
B) a disbursement of money
C) a payment
D) an outflow of cash

Question 38

What calculation should be done when analyzing how much money will be accumulated in an RRSP for retirement purposes?

A) Discounted payments should be subtracted from the initial disbursement.
B) Annual payments should be discounted.
C) Undiscounted payments should be added.
D) Annual payments should be compounded.

Question 39

Which of the following tasks uses compound interest tables?

A) preparing operating budgets
B) calculating the accounting rate of return
C) calculating RRSPs
D) evaluating break-even points

Question 40

What can be concluded when the NPV is 0?

A) The undiscounted cash inflows equal the discounted cash outflow.
B) The discounted cash inflows equal the cash outflow.
C) The undiscounted cash inflows equal the undiscounted cash outflow.
D) The discounted cash outflow equals the undiscounted cash inflows.

Question 41

The rate at which the value of money is traded off is a function of time.

Question 42

A dollar earned today is worth less tomorrow.

Question 43

Inflation represents a price-rise characteristic of periods of prosperity.

Question 44

Risk represents the level of expectations (probabilities) that something will happen in the future.

Question 45

Time value of money and inflation means the same thing.

Question 46

Although risk and capital decisions are closely related, it is important however to make the distinction between interest and risk.

Question 47

Investment decisions deal with two key concepts: time and cash.

Question 48

Cash outflow represents the receipt of money generated by revenue less expenses.

Question 49

Cash inflow can be calculated by adding profit for the year to depreciation.

Question 50

A dollar earned next year is worth less today.

Question 51

Cash outflows represent disbursements and cash inflows represent receipts.

Question 52

Compounding deals with present value amounts of future receipts.

Question 53

A $1,000 amount received today will be worth more tomorrow because of time.

Question 54

If money is invested at 10% and the rate of inflation is 2%, this means that the value of the future investment will be worth 8%.

Question 55

The algebraic formulas for interest tables are made up of symbols and letters. The symbol "n" means "number of disbursements".

Question 56

The algebraic formulas for interest tables are made up of symbols and letters. The symbol "i/y" means "inflation per year".

Question 57

The algebraic formulas for interest tables are made up of symbols and letters. The symbol "FV" means "future value".

Question 58

In dealing with time value of money, "simple interest rate" is normally considered when calculating the future growth of money.

Question 59

Future value means the amount to which a payment or series of payments will grow by a given future date when compounded by a given interest rate.

Question 60

The rule of 72 is a quick way to calculate the approximate number of years it takes for someone's investment to double when compounded annually at a particular rate of interest.

Question 61

By using the rule of 72, if you want to find how many years it will take for a 15% investment to double, all you need to do is divide 72 by 15.

Question 62

A dollar received five years from now when discounted at 15% would be worth more today than if this same amount would be discounted at 10%.

Question 63

Discounting is the process of finding the future value of a series of future cash flows.

Question 64

The present value of a 5%, $100 5-year annuity would be worth less than receiving $100 today.

Question 65

Interest tables contain compound or discount percentages than can be used to calculate the future or present value of single or annuity amounts.

Question 66

Present value means the value today of a future payment or stream of payments discounted at a specific interest rate.

Question 67

To find the net present value, one has to find the present value of the future cash inflows less the initial cash outflow.

Question 68

To find the net present value, one has to discount the profit for the year figure, less the initial cash disbursement.

Question 69

The internal rate of return is defined as the interest rate that equates the cost of an investment (cash outflow) to the present value of the expected returns from the investment (cash inflow).

Question 70

When the net present value of an investment is negative, it means that project is worth the risk.

Question 71

In capital budgeting decisions, the internal rate of return of a project should be more than the weighted average cost of capital.

Question 72

To calculate the net present value, the cash flows should always be brought into the future before being discounted.

Question 73

In capital budgeting, the four key elements that are taken into consideration when calculating the IRR are the cash outflow, the cash inflows, the expected life of the asset and the simple interest tables.

Question 74

A 1.412 number is a typical discount factor for a single sum.

Question 75

To calculate the present value of a series of even receipts, one can use the annuity tables.

Question 76

A $1,000 amount received "today" would be worth less if it was discounted.

Question 77

A mortgage payment can be considered an annuity.

Question 78

In capital budgeting, discount factors rather than compound factors are normally used.

Question 79

Money has a time value because of the existence of _____________________________.

Question 80

_____________________________ represents a price-rise characteristic in periods of prosperity.