corporate finance chapter 4

The concept of time value of money is based on the principle that:

• Money should always be invested in stocks

• Money today is worth more than the same amount in the future

• Money today is worth less than the same amount in the future

• Money has a fixed value regardless of time

The process of calculating the future value of an investment or loan is known as:

• Discounting

• Compounding

• Amortization

• Depreciation

The interest rate used to bring future cash flows to their present value is called the:

• Discount rate

• Compound rate

• Nominal rate

• Effective rate

The formula for calculating the future value (FV) of an investment is:

• FV = PV / (1 + r)^n

• FV = PV * (1 + r)^n

• FV = PV * (1 - r)^n

• FV = PV / (1 - r)^n

The formula for calculating the present value (PV) of a future cash flow is:

• PV = FV / (1 + r)^n

• PV = FV * (1 + r)^n

• PV = FV * (1 - r)^n

• PV = FV / (1 - r)^n

The concept of "opportunity cost" is closely related to the time value of money because it represents:

• The cost of borrowing money

• The potential gain from investing money

• The cost of inflation over time

• The cost of delayed payments

The concept of "discounting" refers to:

• The process of calculating the interest earned on an investment

• The process of calculating the present value of future cash flows

• The process of calculating the future value of an investment

• The process of adjusting cash flows for inflation

The concept of the time value of money is important in financial decision-making because it helps to:

• Determine the profitability of an investment

• Assess the risk associated with an investment

• Evaluate the liquidity of an investment

• Measure the tax implications of an investment

For a proposed purchase to be acceptable, the PV of the future cash flows must:

• be less than the cost of the purchase.

• be positive at the relevant discount rate.

• equal the purchase price.

• be positive at all discount rates.

• equal or exceed the cost of the purchase.

In which way does a perpetuity differ from an annuity?

• Perpetuity cash flows vary with the market rate of interest.

• Perpetuity cash flows never cease.

• Annuity cash flows occur at irregular intervals of time.

• Perpetuity cash flows are variable while annuity payments are constant.