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

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

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 that 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

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