Exam 3: Time Value of Money: an Introduction

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 in fiveyears' time. Steve concludes that in five years' time he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision?

What is the present value (PV) of $80,000 received ten years from now, assuming the interest rate is 5% per year?

Why are arbitrage opportunities short-lived?

Which of the following statements is FALSE?

Why should interest rates be generally positive?

Why should you approach every problem by drawing a timeline?

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company?

Which of the following is an example of arbitrage?

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?

Which of the following statements regarding the valuing of costs and benefits is NOT correct?

If the one-year discount factor is equal to 0.90909, the interest must be equal t?

A metal fabrication company is pricing raw supplies of aluminium.The following are the costs to the company to receive one tonne of aluminium from various sources. Which source offers the best price for aluminium per tonne?

To enable costs and benefits to be compared they are typically converted into cash value at the time the benefit is received.

Which of the following is the best statement of the Valuation Principle?

Owen expects to receive $20,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 7.5%, how much money can he borrow from the bank on the basis of this information?

In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firm's investors.

A firm has contracted to supply 500,000 gallons of propane fuel for $1.49 million to the local council. The council wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?

To compute the future value of a cash flow, you mus?

A dollar today and a dollar in one year may be considered to be equivalent?

The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.