Chapter 5 Time Value of Money (with Questions Answers)

Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)
Chapter 5 Time Value of Money

5.1 The role of time value in finance

1) The main idea behind the time value of money is that a dollar today is worth more than a
dollar in the future because ________.
A) inflation erodes the value of money over time
B) investors can earn a return on money they have today and thereby have more money in the
future
C) the future is more uncertain than the present
D) investors are impatient
Answer: B
Diff: 1
Topic: Basic Time Value Concepts
Learning Obj.: LG 1
Learning Outcome: F-03
AACSB: Reflective Thinking

2) You invest a certain amount of money today. The process of determining how much money
that investment will produce in the future is called ________.
A) discounting
B) compounding
C) present value
D) annuitizing the cash flow
Answer: B
Diff: 1
Topic: Basic Time Value Concepts
Learning Obj.: LG 1
Learning Outcome: F-03
AACSB: Reflective Thinking

3) The process of taking cash flow that is received or paid in the future and stating that cash flow
in present value terms is called discounting.
Answer: TRUE
Diff: 1
Topic: Basic Time Value Concepts
Learning Obj.: LG 1
Learning Outcome: F-03
AACSB: Reflective Thinking




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,4) A certain investment that costs $10,000 today promises to pay you $10,500 in five years. This
investment ________.
A) is unambiguously a good investment
B) is unambiguously a bad investment
C) may be a good investment if the rate of return you can earn an alternative investments is very
low
D) may be a good investment if the rate of return you can earn on alternative investments is very
high
Answer: C
Diff: 1
Topic: Basic Time Value Concepts
Learning Obj.: LG 1
Learning Outcome: F-03
AACSB: Reflective Thinking

5) Since individuals generally have opportunities to earn positive rates of return on their funds,
the timing of cash flows does not have any significant economic consequences.
Answer: FALSE
Diff: 1
Topic: Role of Time Value in Finance
Learning Obj.: LG 1
Learning Outcome: F-03
AACSB: Analytical Thinking

6) The time value of money is based on the belief that a dollar that will be received at some
future date is worth more than a dollar today.
Answer: FALSE
Diff: 1
Topic: Role of Time Value in Finance
Learning Obj.: LG 1
Learning Outcome: F-03
AACSB: Analytical Thinking

5.2 Single amounts

1) For any positive interest rate, the future value of $100 increases with the passage of time.
Thus, the longer the period of time, the greater the future value.
Answer: TRUE
Diff: 1
Topic: Future Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking




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,2) Future value is the value of a future amount at the present time, found by applying compound
interest over a specified period of time.
Answer: FALSE
Diff: 1
Topic: Future Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking

3) The greater the interest rate and the longer the period of time, the higher the present value.
Answer: FALSE
Diff: 1
Topic: Present Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking

4) Everything else being equal, the higher the interest rate, the higher the future value.
Answer: TRUE
Diff: 1
Topic: Future Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking

5) Future value increases with increases in the interest rate or the period of time funds are left on
deposit.
Answer: TRUE
Diff: 1
Topic: Future Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking

6) Everything else being equal, the higher the discount rate, the higher the present value.
Answer: FALSE
Diff: 1
Topic: Present Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking




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, 7) Everything else being equal, the longer the period of time, the lower the present value.
Answer: TRUE
Diff: 1
Topic: Present Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking

8) ________ is the amount earned on a deposit that has become the part of the principal at the
end of a specified time period.
A) Discount interest
B) Compound interest
C) Primary interest
D) Future value
Answer: B
Diff: 1
Topic: Future Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking

9) The future value of $100 received today and deposited at 6 percent for four years is closest to
________.
A) $126
B) $79
C) $124
D) $116
Answer: A
Diff: 1
Topic: Future Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking

10) The future value of $200 received today and deposited at 8 percent for three years is
approximately ________.
A) $248
B) $252
C) $159
D) $253
Answer: B
Diff: 1
Topic: Future Value
Learning Obj.: LG 2
Learning Outcome: F-03
AACSB: Analytical Thinking


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Copyright © 2019 Pearson Education, Inc.