Time Value of Money: Master the Concept for Corporate Finance

Question 1

Considering the time value of money, which investment is more favorable? Explain your choice.

Accepted Answer

Investment A: $10,000 initial investment, $12,000 return in 5 years, 5% annual interest rate

Answer

Investment B: $10,000 initial investment, $12,000 return in 5 years, 4% annual interest rate

Answer

Both investments are equally favorable

Answer

Neither investment is preferable

Question 2

Which of the following scenarios will result in a higher net present value (NPV) for an investment project?

Accepted Answer

Lower initial investment cost and higher expected cash flows

Answer

Higher initial investment cost and higher expected cash flows

Answer

Lower initial investment cost and lower expected cash flows

Answer

Higher initial investment cost and higher required rate of return

Question 3

How does inflation impact the time value of money?

Accepted Answer

It reduces the value of money over time, lowering its time value.

Answer

It increases the time value of money.

Answer

It does not affect the time value of money.

Question 4

The present value of a future cash flow is its value today, discounted at the:

Accepted Answer

Interest rate

Answer

Inflation rate

Answer

Risk of the investment

Answer

Compounding frequency

Question 5

Which of the following does NOT affect the time value of money?

Accepted Answer

Risk of the investment

Answer

Interest rate

Answer

Inflation rate

Answer

Compounding frequency

Question 6

Which of the following is a common application of time value of money in corporate finance?

Accepted Answer

Capital budgeting

Answer

Debt restructuring

Answer

Share buybacks

Answer

Dividend policy

Question 7

What does an Internal Rate of Return (IRR) of 12% for a project imply?

Accepted Answer

The project's discount rate is 12%

Answer

The project's NPV is 12%

Answer

The project's payback period is 12 years

Answer

Insufficient information to determine the project's profitability

Question 8

Which of the following factors does NOT influence the present value of a future cash flow?

Accepted Answer

Risk associated with the cash flow

Answer

Discount rate

Answer

Time until receipt of cash flow

Answer

Amount of the cash flow

Question 9

What is the fundamental principle behind the concept of time value of money?

Accepted Answer

Money has a different value at different points in time.

Answer

Money loses its value over time due to inflation.

Answer

Money can be invested to earn interest.

Answer

Money can be borrowed and repaid with interest.

Question 10

A bank offers a 5-year certificate of deposit (CD) with a 2.5% annual interest rate compounded quarterly. What is the effective annual rate (EAR) of the CD?

Accepted Answer

2.52%

Answer

2.50%

Answer

2.51%

Answer

2.53%

Question 11

What is the formula to calculate the present value of a future cash flow?

Accepted Answer

PV = FV / (1 + r) ^ n

Answer

PV = FV * (1 + r) ^ n

Answer

PV = FV + r * n

Answer

PV = FV - r * n

Question 12

Which of the following is an advantage of using the time value of money concept?

Accepted Answer

It allows for the accurate comparison of cash flows occurring at different points in time.

Answer

It assumes that the inflation rate will always remain constant.

Answer

It assumes that all future cash flows are certain.

Answer

It eliminates the need for using financial calculators.

Question 13

What is the term used to describe the difference between the present value of a future cash flow and its face value?

Accepted Answer

Discount

Answer

Premium

Answer

Interest

Answer

Return

Question 14

Inflation erodes the value of money over time. How does this impact its time value and what are the implications for long-term financial planning?

Accepted Answer

Inflation reduces the time value of money.

Answer

Inflation increases the time value of money.

Answer

Inflation has no effect on the time value of money.

Question 15

Which of the following statements about the relationship between present value and future value is correct?

Accepted Answer

The relationship depends on the interest rate and investment period.

Answer

Present value is always greater than future value.

Answer

Future value is always greater than present value.

Answer

Present value and future value are equal.

Question 16

How does considering risk and uncertainty impact the selection of the discount rate and the interpretation of present values?

Accepted Answer

The discount rate rises as a result of risk and uncertainty.

Answer

Risk and uncertainty enhance the dependability of present value computations.

Answer

When determining a discount rate, it is not necessary to take into account risk and uncertainty.

Answer

The interpretation of present values is unaffected by risk and uncertainty.

Question 17

Which of the following statements best describes the concept of time value of money (TVM)?

Accepted Answer

A dollar today is worth more than a dollar in the future.

Answer

The value of money remains constant over time.

Answer

TVM is only applicable to short-term investments.

Answer

TVM assumes a fluctuating rate of interest.

Question 18

Which of the following factors does NOT affect the present value of a cash flow?

Accepted Answer

Inflation rate

Answer

Discount rate

Answer

Number of years

Answer

Timing of cash flows

Question 19

Which of the following is NOT an application of TVM in corporate finance?

Accepted Answer

Risk analysis

Answer

Capital budgeting

Answer

Dividend valuation

Answer

Bond pricing

Question 20

Which of the following is NOT a factor that influences the time value of money?

Accepted Answer

Risk

Answer

Interest rates

Answer

Inflation

Answer

Investment term

Question 21

What is the present value of a perpetuity that pays $100 annually, starting one year from now, assuming a discount rate of 8%?

Accepted Answer

$1,250

Answer

$1,000

Answer

$1,500

Answer

$1,750

Question 22

An annuity that pays $1,000 annually for 5 years at a discount rate of 10% has a future value of:

Accepted Answer

$4,685

Answer

$4,170

Answer

$5,226

Answer

$5,797

Question 23

A company evaluates a project with an initial cost of $1,000,000 and anticipates a single cash inflow of $1,200,000 at the end of year 5. Given a cost of capital of 10%, what is the Net Present Value (NPV) of this project?

Accepted Answer

$62,483

Answer

$20,000

Answer

$-10,000

Answer

$100,000

Question 24

Which factor among the following will lead to a higher Future Value (FV) of a dollar?

Accepted Answer

Extended time horizon

Answer

Negative inflation rate

Answer

Lower initial investment

Answer

Decreased interest rate

Question 25

Which statement contradicts the principles of time value of money?

Accepted Answer

A dollar in the future is intrinsically more valuable than a dollar today.

Answer

Money has a changing value over time.

Answer

Future cash flows must be discounted to reflect their present worth.

Question 26

A company has issued a bond with a face value of $1,000, a 6% coupon rate, and a maturity of 10 years. If the current market interest rate is 8%, what is the current market price of the bond?

Accepted Answer

$925.93

Answer

$1,000.00

Answer

$1,100.00

Question 27

A company is evaluating an investment opportunity that will generate annual cash flows of $20,000 for the next 5 years. If the appropriate cost of capital for this project is 12%, what is the Present Value (PV) of these cash flows?

Accepted Answer

$85,135

Answer

$90,000

Answer

$100,000

Answer

$75,000

Question 28

Which formula accurately calculates the Future Value (FV) of an annuity where payments are made at the end of each period?

Accepted Answer

FV = PMT * [(1 + r)^n - 1] / r

Answer

FV = PMT * r * (1 + n)

Answer

FV = PMT * [(1 - r)^n - 1] / r

Answer

FV = PMT * n * (1 + r)

Question 29

A loan has a principal amount of $5,000, an annual interest rate of 10%, and a term of 5 years. What is the monthly loan payment?

Accepted Answer

$119.25

Answer

$125.00

Answer

$110.00

Question 30

Which factor has no impact on the Present Value (PV) of a future cash flow?

Accepted Answer

Inflation

Answer

Discount rate

Answer

Time horizon

Answer

Amount of cash flow

Question 31

What is the present worth of a $1,000 *ordinary annuity* which pays $200 at the end of each year for 5 years, given an annual interest rate of 10%? **(Discounting)**

Accepted Answer

$811.08

Answer

$750.00

Answer

$850.00

Question 32

What is the effective annual interest rate of a loan with a 6% semi-annual compounding rate? **(Effective interest rate)**

Accepted Answer

6.14%

Answer

6.50%

Answer

5.86%

Answer

6.25%

Question 33

What is the future value of $5,000 invested at 4% compounded monthly for 10 years? **(Compounding)**

Accepted Answer

$6,608.71

Answer

$6,750.00

Answer

$6,250.00

Answer

$7,000.00

Question 34

What is the equivalent annual annuity of a $10,000 loan to be repaid in 5 equal annual installments, with a 10% annual interest rate? **(Equivalent annual annuity)**

Accepted Answer

$2,593.71

Answer

$3,000.00

Answer

$2,750.00

Answer

$2,500.00

Question 35

What is the present worth of a perpetuity that pays $1,000 annually, given a 5% annual interest rate? **(Present value of a perpetuity)**

Accepted Answer

$20,000.00

Answer

$15,000.00

Answer

$25,000.00

Question 36

What is the future value of a $10,000 *annuity due* that will pay $2,000 at the beginning of each year for 10 years, given an annual interest rate of 6%? **(Future value of an annuity due)**

Accepted Answer

$23,136.39

Answer

$30,000.00

Answer

$25,000.00

Answer

$20,000.00

Question 37

What is the future value of $5,000 invested at 4% compounded quarterly for 15 years? **(Compounding)**

Accepted Answer

$8,222.84

Answer

$8,500.00

Answer

$7,750.00

Answer

$9,000.00

Question 38

Which of the following is NOT a factor that affects the time value of money?

Accepted Answer

Political stability

Answer

Inflation rate

Answer

Time

Answer

Compound interest rate

Question 39

A company invests $100,000 today at an annual compound interest rate of 5%. What is the future value of the investment in 5 years?

Accepted Answer

$127,628.16

Answer

$115,000

Answer

$140,000

Answer

$130,000

Question 40

Which of the following is the formula for calculating present value?

Accepted Answer

PV = FV / (1 + r)^n

Answer

PV = FV * (1 + r)^n

Answer

PV = FV * r * n

Answer

PV = FV / r * n

Question 41

Which of the following is an advantage of using net present value (NPV) in capital budgeting?

Accepted Answer

Considers the time value of money

Answer

Provides a risk-free analysis

Answer

Easy to calculate

Answer

Not affected by inflation

Question 42

Which of the following is a limitation of using internal rate of return (IRR) in capital budgeting?

Accepted Answer

Can lead to multiple IRRs

Answer

Easy to calculate

Answer

Considers the time value of money

Answer

Not affected by project size

Question 43

A company is considering investing in a project that has an initial cost of $200,000 and is expected to generate annual cash flows of $50,000 for 6 years. If the company's required rate of return is 8%, what is the net present value of the project?

Accepted Answer

$124,322.26

Answer

$150,000

Answer

$100,000

Answer

$200,000