What is the formula for calculating future value (FV)?
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FV = PV × (1 + i)ⁿ.
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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.
What should be done if the present value (PV) of net cash inflows is calculated?
Choose the one with the highest figure.
What is the interest rate used for calculating present value called?
The discount rate.
What is compound interest?
Interest earned on an investment that is reinvested to earn more interest.
How do you calculate the sum of principal and interest in simple interest?
Sum of principal = principal + Interest.
What is the interest rate on Maggie's savings account?
5% per annum.
What is the total amount at the end of Year 2?
$1,102.5.
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.
What is the formula for future value (FV) in compound interest?
FV = PV x (1 + r)^n.
What is future value (FV)?
The value at the end of a time period from a sum of money invested.
What is the initial deposit amount Maggie made?
$1,000.
How much interest did Maggie earn in Year 2?
$52.5.
What reflects the additional amount earned on money over time?
The time value of money.
What is the formula for calculating present value (PV)?
PV = FV / (1 + i)^n.
What does simple interest assume?
That the interest will not be re-invested period after period.
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.
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.
What is the formula for Net Present Value (NPV)?
NPV = (PVs of all annual net cash inflows + PV of residual value) – initial investment.
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.
How much interest did Maggie earn in Year 1?
$50.
What does money do over time according to the time value of money?
Money grows or increases in value.
What does it indicate if NPV = 0?
The project should be accepted as the firm earns exactly the cost of capital.
What type of interest do investors usually receive when depositing money in banks?
Compound interest.
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.
What formula is used to calculate the future value at the end of Year 3?
$1,000 (1 + 5%)^3.
What is the total amount (principal + interest) at the end of Year 1?
$1,050.
What do we use as the discount rate if the interest rate is not given?
Cost of capital.
What is present value (PV)?
The current value of a future sum of money.
Why is a dollar received today worth more than in the future?
Because it can be invested to earn interest.
What does it indicate if NPV > 0?
The project should be accepted as the firm earns more than the cost of capital.
What is discounting in personal finance?
The process of finding the present value of a future sum of money.
What is the concept of reinvesting interest earned?
Using the interest earned to increase the principal for future interest calculations.
How does the total interest earned under compound interest compare to simple interest?
It is much greater under compound interest calculation.
What is the process of finding the future value of an investment?
Compounding.
What does it indicate if NPV < 0?
The project should be rejected as the firm earns less than the cost of capital.
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.
What is the formula for calculating simple interest?
Interest = Principal x interest rate x number of periods.
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.
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.
