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Exam 10: Time-Value-Of-Money Concept

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Question 21

True/False

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

A) True
B) False

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Question 22

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Match the words with the term. -internal rate of return

A) savings
B) +$25,000
C) investment
D) 20%
E) 10 years

F) A) and B)
G) All of the above

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Question 23

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Use the interest tables contained at the end of the textbook and/or a financial calculator to do the following exercises with this additional information: Assume a 10% interest rate. -The undiscounted value of the cash outflow is __________________________.

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%.

How is cash inflow calculated?

The opposite of compounding is ____________________ .

Use the interest tables contained at the end of the textbook and/or a financial calculator to do the following exercises. If you receive an inheritance in the amount of $150,000 today or $25,000 each year, calculate the future value of both options by the end of the tenth year. Assume a 10% interest rate. -Option 1 ($150,000 today) would give you ___________________________.

Match the words with the term. -cash inflow

The rule of 72 is a calculation that shows the approximate number of years it takes for an investment to ____________________ when compounded annually.

Use the interest tables contained at the end of the textbook and/or a financial calculator to do the following exercises. An entrepreneur would like to invest $200,000 in a project that would generate, for each year during the next ten years: (a) $140,000 in gross profit, (b) $90,000 in profit before taxes, and (c) $40,000 in net profit for the year. The accountant informed the entrepreneur that the statement of income includes an amount of $10,000. The investment in working capital during the first year of operation would be $60,000. During the last year, he would want to sell the business for $500,000. -The project's NPV at 20% is _______________________________.

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

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.

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

Match the words with the term. -compound and discount factors

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

In capital budgeting, annual cash inflows are considered cash ____________________ .

What yields the largest value?

Use the interest tables contained at the end of the textbook and/or a financial calculator to do the following exercises. An entrepreneur would like to invest $200,000 in a project that would generate, for each year during the next ten years: (a) $140,000 in gross profit, (b) $90,000 in profit before taxes, and (c) $40,000 in net profit for the year. The accountant informed the entrepreneur that the statement of income includes an amount of $10,000. The investment in working capital during the first year of operation would be $60,000. During the last year, he would want to sell the business for $500,000. -The project's NPV at 10% is _______________________________.

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

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