Wiley P2 Sec-E Flashcard

What is the connection between time and interest rates when considering amounts of money? Using an interest rate makes one amount of money equal to a different amount of money at a different point in time. 2 FC..FC002_1709 How can discount rates be used to represent inherent risk on one capital investment versus another in capital budgeting? Use a higher discount rate for the investment with higher inherent risk. 3 FC.unt.FC001_1709 What does Payback method tell us? Payback method measures the amount of time it takes for the original net cash investment to be recovered. 4 FC..FC002_1709 What three factors combine to form an interest rate? 1. Compensation for delaying the use of the money. 2. Reward for taking on risk. The higher the risk, the higher the reward. 3. Adjustment for expected inflation.