Present Value (Worth)

### Does present value account for the time value of money? - [x] Yes, it does. - [ ] No, it does not. - [ ] Only for certain types of investments. - [ ] It depends on the interest rate. > **Explanation:** Present value calculations inherently account for the time value of money by discounting future cash flows to their current value. ### What is the fundamental principle behind the time value of money? - [x] A dollar today is worth more than a dollar in the future. - [ ] Money loses value over time regardless of investments. - [ ] Future money is more valuable than present money. - [ ] Only cash reserves can appreciate. > **Explanation:** The time value of money principle posits that a dollar today has more value than a dollar in the future due to its potential earning capacity. ### Which term is synonymous with the present value method? - [ ] Net Profit Method - [x] Discounted Cash Flow Method - [ ] Amortization Method - [ ] Equity Valuation Method > **Explanation:** The present value method is also known as the Discounted Cash Flow (DCF) method, which evaluates future cash flows to determine their worth today. ### In present value calculations, what does "n" denote in the formula \\[ PV = \frac{FV}{(1 + r)^n} \\]? - [ ] The number of investment types. - [ ] The future value amount. - [ ] The discount rate. - [x] The number of periods. > **Explanation:** In present value calculations, "n" denotes the number of periods over which the money is to be discounted. ### What does a higher discount rate indicate? - [x] Greater future cash flow risk. - [ ] Lower future cash flow risk. - [ ] No change in risk but higher returns. - [ ] Fixed investment timeline. > **Explanation:** A higher discount rate generally indicates a greater perceived risk of future cash flows, leading to a lower present value. ### To which aspect of finance is present value most commonly applied? - [ ] Short-term saving goals. - [x] Long-term investment planning. - [ ] Monthly budgeting. - [ ] Immediate asset liquidation. > **Explanation:** Present value is commonly applied to long-term investment planning and capital budgeting, where future cash flows are assessed in today's terms. ### In the context of the present value, what is an annuity? - [ ] A single lump-sum payment. - [ ] A forever increasing payment stream. - [ ] A one-time large investment. - [x] A series of equal payments made over time. > **Explanation:** An annuity refers to a series of equal payments made at regular intervals over a specified timeframe, and it is often evaluated using present value calculations. ### Why are present-value tables useful? - [ ] They increase the future value of money. - [ ] They fix the discount rate permanently. - [x] They simplify the calculation of present value. - [ ] They guarantee a fixed return on investments. > **Explanation:** Present-value tables simplify the calculation process by providing preset discount factors that can be multiplied by future sums to find their current value. ### How does inflation impact present value? - [x] It reduces the buying power of future money. - [ ] It increases the future buying power. - [ ] It has no impact. - [ ] It counters the discount rate. > **Explanation:** Inflation reduces the buying power of money over time, which is factored into present value calculations, thereby decreasing the value of future sums. ### What equation can represent the calculation of present value? - [x] \\[ PV = \frac{FV}{(1 + r)^n} \\] - [ ] \\[ PV = FV \times (1 + n)^r \\] - [ ] \\[ PV = \frac{n}{FV \times r} \\] - [ ] \\[ PV = FV \times n \times r \\] > **Explanation:** The correct formula for present value is \\[ PV = \frac{FV}{(1 + r)^n} \\], representing the discounted value of future cash flows.