Final Terms Quiz: Time Value of Money

Which of the following best captures the principle behind the Time Value of Money (TVM)?

• Money loses value over time due to inflation.

• A dollar today is worth more than a dollar in the future due to its potential earning capacity.

• Future cash flows are irrelevant in project valuation.

• The nominal value of money is more important than its purchasing power.

An international firm is considering investing in a project that pays $10,000 one year from now. If the opportunity cost of capital is 8%, what is the present value of that cash flow?

• $9,260

• $9,200

• $10,000

• $8,640

An investor deposits $5,000 into an account earning 6% annually, compounded annually. What will be the value of the investment after 5 years?

• $6,691

• $6,500

• $6,750

• $7,000

A project offers quarterly compounding at 4% annual interest. Which of the following is closest to the effective annual rate (EAR)?

• 4.00%

• 4.04%

• 4.06%

• 4.15%

If a project's cash inflow is $15,000 in three years and the discount rate is 7%, what is the present value of that inflow?

• $12,252

• $13,470

• $11,500

• $10,960

Which of the following scenarios best justifies the use of discounting in project valuation?

• When current cash flows are unavailable.

• When comparing projects with identical payback periods.

• When assessing the opportunity cost of future earnings.

• When taxes are unknown.

A firm expects to receive an annual payment of $3,000 for 10 years. If the discount rate is 5%, what is the present value of the annuity?

• $23,000

• $25,000

• $24,623

• $26,500

Which of the following best describes the valuation of a perpetuity?

• The present value is zero since cash flows are infinite.

• It is calculated using a growing annuity formula.

• The present value is constant regardless of the discount rate.

• It is the constant cash flow divided by the discount rate.

A project with the following cash flows: Year 0 = -$20,000, Year 1 = $8,000, Year 2 = $10,000, Year 3 = $6,000. If the discount rate is 10%, what is the NPV?

• $2,348

• $3,420

• $1,948

• $2,672

Which of the following statements about Net Present Value (NPV) is incorrect?

• A positive NPV implies that the project adds value to the firm.

• NPV accounts for the time value of money.

• NPV ignores risk by discounting at the risk-free rate.

• NPV is additive across independent projects.