Question 1

The future value technique uses compounding to find the future value of each cash flow at the end of the project's life.

Accepted Answer

The future value technique indeed uses compounding to find the future value of each cash flow at the end of the project's life. This is achieved by adding up the present values of all cash flows and then calculating their compounded growth over time.

Question 2

The further in the future you receive a dollar, the more it is worth today.

Accepted Answer

The statement is false. The value of a dollar decreases over time due to inflation, so receiving a dollar further in the future would actually make it worth less today.

Question 3

The growth rate over time is exponential.

Accepted Answer

The statement is true. Exponential growth means that the rate of growth increases over time, resulting in a curve that becomes steeper and steeper. This occurs frequently in natural and man-made systems, such as populations of living organisms, investments, and technological advancements.

Question 4

The more frequently the interest payments are compounded, the larger the future value of $1 for a given time period.

Accepted Answer

This is because compound interest means that not only is the initial principal earning interest, but also the interest earned in each period. The more frequently interest is compounded, the more periods there are for this interest to accumulate and earn more interest. This results in a larger future value for $1 over a given time period.

Question 5

The higher the rate of interest, the more likely you will elect to invest your funds and forego current consumption.

Accepted Answer

This statement is true as higher interest rates provide a greater incentive for individuals to save and invest their funds, as they can earn a higher return on their investments. This in turn may result in individuals reducing their current consumption in order to save and invest more.

Question 6

Compound interest consists of both simple interest and interest-on-interest.

Accepted Answer

Compound interest not only pays interest on the initial principal amount but also on the accumulated interest from previous periods, making the interest earned over time greater than simple interest.

Question 7

Berrian invested $5,000 in an account earning 10 percent for one year. If he had left his investment in that account for another two years, he would expect the total interest earned over the three years to be higher by exactly $1,000.

Accepted Answer

The interest earned would be compounded, not simply added, so the total interest over three years would be more than $1,000 higher than the first year's interest.

Question 8

The value of a dollar invested at positive interest rate grows over time.

Accepted Answer

This statement is true. When invested at a positive interest rate, a dollar grows over time due to the addition of interest to the principal amount.

Question 9

The present value technique uses compounding to find the present value of each cash flow at the beginning of the project.

Accepted Answer

The present value technique uses discounting, not compounding, to determine the present value of future cash flows.

Question 10

Individuals prefer to consume goods in the future rather than right away.

Accepted Answer

Individuals generally prefer to consume goods immediately due to the principle of time preference, which suggests that people value present consumption more than future consumption.

Question 11

Future value focuses on the valuation of cash flows received over time, while present value focuses on the valuation of cash flows received at a point in time.

Accepted Answer

The statement is incorrect. Future value focuses on the valuation of cash flows received at a point in time in the future, while present value focuses on the valuation of cash flows received over time.

Question 12

Time value of money is based on the belief that people have a positive time preference for consumption.

Accepted Answer

The time value of money concept assumes that people prefer to have money now instead of waiting to receive it later, which reflects a positive time preference for consumption. Therefore, the statement is true.

Question 13

The present value technique uses discounting to find the present value of each cash flow at the beginning of the project.

Accepted Answer

The present value technique does use discounting to find the present value of each cash flow at the beginning of the project.

Question 14

Compounding accelerates the growth of the total interest earned.

Accepted Answer

Compounding involves adding the interest to the principal amount, which then earns interest on both the principal and the previously earned interest. This results in the total interest earned increasing at a faster rate compared to simple interest.

Question 15

Compound interest consists of interest-on-interest.

Accepted Answer

The answer of Compound interest consists of interest-on-interest....

Question 16

The higher the interest rate on an investment, the more money that is accumulated for any time period.

Accepted Answer

This is because a higher interest rate will result in greater returns on the investment, leading to more money accumulated over time.

Question 17

The future value technique uses discounting to find the future value of each cash flow at the end of the project's life.

Accepted Answer

The future value technique uses compounding, not discounting, to calculate the future value of each cash flow at the end of the project's life. Discounting is used to find the present value.

Question 18

Compounding is the process by which interest earned on an investment is reinvested so that in future periods, interest is earned on the interest as well as the principal.

Accepted Answer

Compounding is a real financial concept and it is true that interest earned on an investment is reinvested. This enables the investor to earn interest on the interest received in the previous period as well as the principal. This allows investments to grow faster over time.

Question 19

The value of a dollar invested at positive interest rate grows over time but at an increasingly slower rate further into the future.

Accepted Answer

At a positive interest rate, the value of a dollar grows at an increasing rate over time due to the effect of compounding interest, not a decreasing rate.

Question 20

The growth rate over time is linear.

Accepted Answer

The growth rate over time can be linear for some cases, but it is not always the case. The growth rate can be exponential or logarithmic, depending on the specific situation. Therefore, the statement "The growth rate over time is linear" is not always true.

Quiz 5: The Time Value of Money