Time Value of Money: Interactive Learning Quizzes for Advanced Diploma in Business

Question 1

Which formula is used to calculate the future value (FV) of a single amount, given the present value (PV), interest rate (r), and number of periods (n)?

Accepted Answer

FV = PV * (1 + r)^n

Answer

PV = FV / (1 + r)^n

Answer

n = FV * (1 + r) / PV

Answer

r = FV * (1 + n) / PV

Question 2

A business takes out a loan of £50,000 that will be repaid with equal annual payments over 10 years. If the interest rate is 8%, what is the annual payment?

Accepted Answer

£7,085

Answer

£6,209

Answer

£8,053

Answer

£9,139

Question 3

A project has an estimated net present value (NPV) of £10,000. Should the project be accepted?

Accepted Answer

Yes, because a positive NPV indicates a profitable investment.

Answer

No, because the NPV is too low.

Answer

More information is needed to make a decision.

Answer

The NPV is irrelevant for decision-making.

Question 4

The internal rate of return (IRR) is the discount rate that makes the NPV of a project equal to:

Accepted Answer

Zero

Answer

One

Answer

The project cost

Answer

The project payback period

Question 5

A company is considering expanding its operations. The expansion project has a positive NPV and a high IRR. Which conclusion can be reasonably drawn?

Accepted Answer

The expansion project is likely to be a sound investment.

Answer

The company should not pursue the expansion.

Answer

More information is needed to make a decision.

Answer

The project will definitely lead to a decrease in share prices.

Question 6

Which formula is used to calculate the future value (FV) of an investment given its present value (PV), interest rate (r), and number of years (n)?

Accepted Answer

FV = PV * (1 + r)^n

Answer

FV = PV * (1 + r)

Answer

FV = PV / (1 + r)

Answer

FV = PV / (1 + r)^n

Question 7

Which of the following is NOT a factor that influences the time value of money?

Accepted Answer

Risk

Answer

Inflation

Answer

Interest rate

Answer

Investment horizon

Question 8

What is the primary difference between present value and future value?

Accepted Answer

Present value is the value of money today, while future value is its value in the future.

Answer

Present value considers the time value of money, while future value does not.

Answer

Future value considers the time value of money, while present value does not.

Answer

Future value is the value of money today, while present value is its value in the future.

Question 9

What is the concept of discounting in the context of time value of money?

Accepted Answer

The process of finding the present value of a future sum of money.

Answer

The process of finding the future value of a present sum of money.

Answer

The process of calculating the interest rate on a loan.

Answer

The process of calculating the number of years it takes to repay a loan.

Question 10

A series of equal payments made at regular intervals over a specified period is called:

Accepted Answer

Annuity

Answer

Perpetuity

Answer

Amortization

Answer

Sinking fund

Question 11

The formula for calculating the future value (FV) of an annuity is:

Accepted Answer

FV = PMT * ((1 + r)^n - 1) / r

Answer

FV = PV * (1 + r)^n

Answer

FV = PV / (1 - r)

Answer

FV = PMT / (1 + r)

Question 12

The formula for calculating the present value of an annuity is:

Accepted Answer

PV = PMT x (1 - (1 + r)^-n) / r

Answer

PV = PMT x ((1 + r)^n - 1) / r

Answer

PV = PMT x r x ((1 + r)^n - 1)

Answer

PV = PMT x n x ((1 + r)^n - 1)

Question 13

Which of the following is NOT a method for calculating the time value of money?

Accepted Answer

Linear extrapolation

Answer

Compound interest tables

Answer

Financial calculators

Answer

Amortization schedules

Question 14

The process of converting a future value back to its present value is called:

Accepted Answer

Discounting

Answer

Compounding

Answer

Annuitization

Answer

Amortization

Question 15

In the context of time value of money calculations, what is discounting and why is it important in financial decision-making?

Accepted Answer

Discounting is adjusting future cash flows to their present value, considering the time value of money.

Answer

Discounting is only used to account for inflation when calculating future cash flows.

Answer

Discounting is only applicable to cash flows occurring more than a year from now.

Answer

Discounting involves increasing future cash flows to account for interest earned over time.

Question 16

Which formula is used to calculate the future value (FV) of an investment?

Accepted Answer

FV = PV x (1 + r)^n

Answer

FV = PV x (1 - r)^n

Answer

PV = FV x (1 + r)^n

Answer

PV = FV x (1 - r)^n

Question 17

Which of the following is a defining characteristic of an annuity?

Accepted Answer

Regular payments made over a specified period

Answer

A single lump sum payment made at the end of a period

Answer

Payments made only at the start of a period

Answer

Payments that increase in value over time

Question 18

Which of the following accurately defines the present value (PV) of a future cash flow?

Accepted Answer

The current value of a future amount, discounted by the appropriate interest rate and time period

Answer

The amount set aside today to equal a future value

Answer

The total amount of money to be received in the future

Answer

The value of money that will be received in the future

Question 19

Which of the following is NOT a factor that influences the time value of money?

Accepted Answer

Expected rate of inflation

Answer

Interest rate

Answer

Amount of investment

Answer

Investment horizon

Question 20

A bond with a £1,000 face value has an annual coupon rate of 5%. If its market price is £900, calculate the bond's yield to maturity (YTM).

Accepted Answer

YTM = 6.11%

Answer

YTM = 5.56%

Answer

YTM = 6.67%

Answer

YTM = 5.00%

Question 21

Which of the following is a limitation of relying on time value of money calculations?

Accepted Answer

Assumes certainty in future cash flows

Answer

Considers the influence of inflation

Answer

Applicable to all types of investments

Question 22

Company XYZ is evaluating two investment options: Option X with an NPV of £10,000 and Option Y with an NPV of -£5,000. According to the NPV criterion, which option should the company pursue?

Accepted Answer

Option X

Answer

Neither option

Answer

Both options

Answer

Option Y