An amount of money to be received in the future is worth less today than the sta

Question

An amount of money to be received in the future is worth less today than the stated amount. Discounting refers to the growth process that turns $1 today into a greater value several periods in the future. Compounding refers to the growth process that turns $1 today into a greater value several periods in the future The interest factor for the future value of a single sum is equal to (1 + n)!. The time value of money is not a useful concept m determining the value of a bond or in capital investment decisions. if a single amount were put on deposit at a given interest rate and allowed to grow, its future value could be determined by reference to a "future value of $1" table. The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions covering multiple periods of time. The future value is the same concept as the way money grows in a bank account. Cash flow decisions that ignore the time value of money probably not be as accurate as those decisions that do rely on the time value of money. The interest factor for a future value (FV) is equal to (1 + i) The formula PV = FV(1 + n)^i will determine the present value of $1. To determine the current worth of four annual payments of $1,000 at 4%, one would refer to a table for the present value of $1. As the interest rate increases, the Interest factor (IF) for the present value of $1 increases. The interest factor for the present value of a single amount is the reciprocal of the future value interest factor. Higher interest rates (discount rates) reduce the present value of amounts to be received m the future. In determining the future value of an ordinary annuity, the final payment is not compounded at all. The future value of an ordinary annuity assumes that the payments are received at the end of the year and that the last payment does not compound. The present value of an annuity table provides a "shortcut" for calculating the future value of a steady stream of payments, denoted as A. The same value can be calculated directly from the following equation: PV_A = A[1/(1 + i)]^1 + A [1/(1 + i)]^2 + A[1/(1 + i)]^n The amount of annual payments necessary to accumulate a desired total can be found by reference to the present value of an annuity table. K an individual s cost of capital were OH, the person would prefer to receive $110 at the end of one year rather than $100 right now. In evaluating capital investment projects, current outlays must be judged against the current value of future benefits. The farther into the future any given amount Is received, the larger its present value. An annuity is a series of consecutive payments of equal amount. Using semi-annual compounding rather than annual compounding will increase the future value of an annuity. The amount of annual payments necessary to repay a mortgage loan can be found by reference to the present value of an annuity table.

Explanation / Answer

1. True

2. False

3. True

4. False

5. True

6. False

7. True

8. True

9. False

10. True

11. False

12. True

13. False

14.True

15. True

16. True

17. True

18. True

19. False

20. False

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.