Question

1. What is the TERM Used to Describe the "Time Value of Money"

2. Which One is the most Valuable Investment option? Assume Annual Compounding at an interest rate of 6%?

a. They are All the Same

b. $20,000 in 9 years

c. $10,000 Today

d. $40,000 in 18 years

3. What is the Term used for a Stream of Equal Periodic Cash Flows.

4. Which One is False?

a. Most Capital Projects have little Risk to an Organization

b. The “Net Present Value” and the “Internal Rate of Return” Investment Evaluation Methods always Consider the Time Value of Money in the Evaluation Process.

c. Most Capital Projects Become Sunk Costs Quickly.

d. The “Cash Payback Period” and the “Accounting Annual Rate of Return” Investment Evaluation Methods Do Not consider the Time Value of Money in the Evaluation Process.

5. Which One is True?

a. Capital Projects usually have Low Costs and Short Lives

b. Compounded Interest is a series of Identical Cash Flows

c. An Annuity is the process of computing interest on interest previously earned

d. A Net present Value Calculation will consider the Time Value of Money

Answer 1

1. "Time value of money" means that the value of a unit of money is different in different time periods. The value of a sum of money received today is more than its value received after some time.The time value of money can also be referred to time preference for money.

so "Time preference for money" is also the term used to describe as "Time value of money".

2. To compare all the option we should calculate the present value of all option & then compare.

(b) Present value of $ 20000 in 9 years @ 6% discounting = 20000*PVIF(6%,9years)

= 20000*0.591898

= $ 11837.97

(c) Present value of $ 10000 as on today = 10000*1 = $ 10000

(d) Present value of $ 40000 in 18 years @ 6% discounting = 40000*PVIF(6%,18years)

= 40000*0.350344

= $ 14013.75

Now if he received the amount then he should go with option (d).

and if he need to invest/give in one of the given option at now then he should go with option (c) only in case if all will have the same result/mature/received amount.

3. Annuity is a stream of equal annual cash flows.

4. (c)

5. (d) as NPV is found by subtracting a projecs initial investment from the present value of its cash inflows discounted at the firm's cost of capital.

Please check with your answer and let me know.