What is the formula for calculating future value (FV)?
FV = PV × (1 + i)ⁿ.
What is needed for present value to grow into a specific sum in the future?
The amount needed today.
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p.2
Future Value (PV) and Future Value (FV)

What is the formula for calculating future value (FV)?

FV = PV × (1 + i)ⁿ.

p.3
Present Value (PV) and Future Value (FV)

What is needed for present value to grow into a specific sum in the future?

The amount needed today.

p.1
Investment Decision Making

What should be done if the present value (PV) of net cash inflows is calculated?

Choose the one with the highest figure.

p.3
Time Value of Money

What is the interest rate used for calculating present value called?

The discount rate.

p.3
Simple vs Compound Interest

What is compound interest?

Interest earned on an investment that is reinvested to earn more interest.

p.3
Simple vs Compound Interest

How do you calculate the sum of principal and interest in simple interest?

Sum of principal = principal + Interest.

p.4
Financial Management Basics

What is the interest rate on Maggie's savings account?

5% per annum.

p.4
Compounding and Discounting Concepts

What is the total amount at the end of Year 2?

$1,102.5.

p.2
Compounding and Discounting Concepts

What is compounding in the context of personal finance?

The process of earning profit on an investment that is reinvested to earn even more profit.

p.3
Future Value (FV) and Present Value (PV)

What is the formula for future value (FV) in compound interest?

FV = PV x (1 + r)^n.

p.2
Future Value (PV) and Future Value (FV)

What is future value (FV)?

The value at the end of a time period from a sum of money invested.

p.4
Financial Management Basics

What is the initial deposit amount Maggie made?

$1,000.

p.4
Compounding and Discounting Concepts

How much interest did Maggie earn in Year 2?

$52.5.

p.2
Time Value of Money

What reflects the additional amount earned on money over time?

The time value of money.

p.3
Present Value (PV) and Future Value (FV)

What is the formula for calculating present value (PV)?

PV = FV / (1 + i)^n.

p.3
Simple vs Compound Interest

What does simple interest assume?

That the interest will not be re-invested period after period.

p.2
Compounding and Discounting Concepts

What happens to the interest earned in the current period in compounding?

It becomes part of the principal, and the total sum earns interest in subsequent periods.

p.2
Time Value of Money

What does the time value of money concept imply about a dollar received today?

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

p.1
Net Present Value (NPV) Calculation

What is the formula for Net Present Value (NPV)?

NPV = (PVs of all annual net cash inflows + PV of residual value) – initial investment.

p.1
Time Value of Money

What is the concept of the time value of money?

It states that money available today is worth more than the same amount in the future due to its potential earning capacity.

p.4
Compounding and Discounting Concepts

How much interest did Maggie earn in Year 1?

$50.

p.2
Time Value of Money

What does money do over time according to the time value of money?

Money grows or increases in value.

p.1
Net Present Value (NPV) Calculation

What does it indicate if NPV = 0?

The project should be accepted as the firm earns exactly the cost of capital.

p.2
Compounding and Discounting Concepts

What type of interest do investors usually receive when depositing money in banks?

Compound interest.

p.1
Nominal vs Effective Interest Rates

What are the key concepts to distinguish between nominal and effective rate of return?

Nominal rate is the stated interest rate, while effective rate accounts for compounding over a period.

p.4
Future Value (FV) and Present Value (PV)

What formula is used to calculate the future value at the end of Year 3?

$1,000 (1 + 5%)^3.

p.4
Compounding and Discounting Concepts

What is the total amount (principal + interest) at the end of Year 1?

$1,050.

p.3
Time Value of Money

What do we use as the discount rate if the interest rate is not given?

Cost of capital.

p.3
Present Value (PV) and Future Value (FV)

What is present value (PV)?

The current value of a future sum of money.

p.2
Time Value of Money

Why is a dollar received today worth more than in the future?

Because it can be invested to earn interest.

p.1
Net Present Value (NPV) Calculation

What does it indicate if NPV > 0?

The project should be accepted as the firm earns more than the cost of capital.

p.2
Compounding and Discounting Concepts

What is discounting in personal finance?

The process of finding the present value of a future sum of money.

p.4
Compounding and Discounting Concepts

What is the concept of reinvesting interest earned?

Using the interest earned to increase the principal for future interest calculations.

p.3
Simple vs Compound Interest

How does the total interest earned under compound interest compare to simple interest?

It is much greater under compound interest calculation.

p.2
Compounding and Discounting Concepts

What is the process of finding the future value of an investment?

Compounding.

p.1
Net Present Value (NPV) Calculation

What does it indicate if NPV < 0?

The project should be rejected as the firm earns less than the cost of capital.

p.1
Effective Rate of Return (ERR)

What is the formula for the Effective Rate of Return (ERR)?

ERR = (1 + i/m) - 1, where i is the nominal interest rate and m is the number of compounding periods.

p.3
Simple vs Compound Interest

What is the formula for calculating simple interest?

Interest = Principal x interest rate x number of periods.

p.1
Future Value (FV) and Present Value (PV)

What is the formula for Future Value (FV)?

FV = PV (1 + i)^n, where PV is present value, i is the interest rate, and n is the number of periods.

p.1
Future Value (FV) and Present Value (PV)

What is the formula for Present Value (PV)?

PV = FV / (1 + i)^n, where FV is future value, i is the interest rate, and n is the number of periods.

Study Smarter, Not Harder
Study Smarter, Not Harder