Principles of Managerial Finance 8th Edition by Chad J. Zutter – Test Bank

Principles of Managerial Finance 8th Edition by Chad J. Zutter – Test Bank

Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)

Chapter 5 Time Value of Money

5.1 The role of time value in finance

1) The main idea behind the time value of money is that a dollar today is worth more than a

dollar in the future because ________.

A) inflation erodes the value of money over time

B) investors can earn a return on money they have today and thereby have more money in the

future

C) the future is more uncertain than the present

D) investors are impatient

Answer: B

Diff: 1

Topic: Basic Time Value Concepts

Learning Obj.: LG 1

Learning Outcome: F-03

AACSB: Reflective Thinking

2) You invest a certain amount of money today. The process of determining how much money

that investment will produce in the future is called ________.

A) discounting

B) compounding

C) present value

D) annuitizing the cash flow

Answer: B

Diff: 1

Topic: Basic Time Value Concepts

Learning Obj.: LG 1

Learning Outcome: F-03

AACSB: Reflective Thinking

3) The process of taking cash flow that is received or paid in the future and stating that cash flow

in present value terms is called discounting.

Answer: TRUE

Diff: 1

Topic: Basic Time Value Concepts

Learning Obj.: LG 1

Learning Outcome: F-03

AACSB: Reflective Thinking2

Copyright © 2019 Pearson Education, Inc.

4) A certain investment that costs $10,000 today promises to pay you $10,500 in five years. This

investment ________.

A) is unambiguously a good investment

B) is unambiguously a bad investment

C) may be a good investment if the rate of return you can earn an alternative investments is very

low

D) may be a good investment if the rate of return you can earn on alternative investments is very

high

Answer: C

Diff: 1

Topic: Basic Time Value Concepts

Learning Obj.: LG 1

Learning Outcome: F-03

AACSB: Reflective Thinking

5) Since individuals generally have opportunities to earn positive rates of return on their funds,

the timing of cash flows does not have any significant economic consequences.

Answer: FALSE

Diff: 1

Topic: Role of Time Value in Finance

Learning Obj.: LG 1

Learning Outcome: F-03

AACSB: Analytical Thinking

6) The time value of money is based on the belief that a dollar will be received at some

future date is worth more than a dollar today.

Answer: FALSE

Diff: 1

Topic: Role of Time Value in Finance

Learning Obj.: LG 1

Learning Outcome: F-03

AACSB: Analytical Thinking

5.2 Single amounts

1) For any positive interest rate, the future value of $100 increases with the passage of time.

Thus, the longer the period of time, the greater the future value.

Answer: TRUE

Diff: 1

Topic: Future Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking3

Copyright © 2019 Pearson Education, Inc.

2) Future value is the value of a future amount at the present time, found by applying compound

interest over a specified period of time.

Answer: FALSE

Diff: 1

Topic: Future Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking

3) The greater the interest rate and the longer the period of time, the higher the present value.

Answer: FALSE

Diff: 1

Topic: Present Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking

4) Everything else being equal, the higher the interest rate, the higher the future value.

Answer: TRUE

Diff: 1

Topic: Future Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking

5) Future value increases with increases in the interest rate or the period of time funds are left on

deposit.

Answer: TRUE

Diff: 1

Topic: Future Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking

6) Everything else being equal, the higher the discount rate, the higher the present value.

Answer: FALSE

Diff: 1

Topic: Present Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking4

Copyright © 2019 Pearson Education, Inc.

7) Everything else being equal, the longer the period of time, the lower the present value.

Answer: TRUE

Diff: 1

Topic: Present Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking

8) ________ is the amount earned on a deposit that has become the part of the principal at the

end of a specified time period.

A) Discount interest

B) Compound interest

C) Primary interest

D) Future value

Answer: B

Diff: 1

Topic: Future Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking

9) The future value of $100 received today and deposited at 6 percent for four years is closest to

________.

A) $126

B) $79

C) $124

D) $116

Answer: A

Diff: 1

Topic: Future Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking

10) The future value of $200 received today and deposited at 8 percent for three years is

approximately ________.

A) $248

B) $252

C) $159

D) $253

Answer: B

Diff: 1

Topic: Future Value

Learning Obj.: LG 2

Learning Outcome: F-03

AACSB: Analytical Thinking