Multiple Choice
Which of the following best describes the average rate of growth for an investment over a period of time?
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10. Time Value of Money
Time Value of Money Equations
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Understanding that money grows over time explains why you need to:
A
Record all cash flows at their nominal value regardless of timing.
B
Assume that the value of money remains constant over time.
C
Discount future cash flows to their present value when making investment decisions.
D
Ignore the interest rate when evaluating long-term projects.
Verified step by step guidance1
Understand the concept of the time value of money, which states that a dollar today is worth more than a dollar in the future due to its earning potential.
Learn that discounting future cash flows to their present value is a method used to account for the time value of money in investment decisions.
Identify the formula for present value (PV), which is: , where FV is future value, r is the discount rate, and n is the number of periods.
Recognize that discounting future cash flows helps compare the value of cash flows occurring at different times, enabling better investment decision-making.
Understand that ignoring the interest rate or failing to discount future cash flows can lead to inaccurate evaluations of long-term projects.
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