Answers to Concepts Review and Critical Thinking Questions
1.
The four parts are the present value (PV), the future value (FV), the discount rate (
r
), and the
life of the investment (
t
).
2.
Compounding refers to the growth of a dollar amount through time via reinvestment of
interest earned. It is also the process of determining the future value of a investment.
Discounting is the process of determining the value today of an amount to be received in the
future.
3.
Future values grow (assuming a positive rate of return); present values shrink.
4.
The future value rises (assuming it’s positive); the present value falls.
5.
It would appear to be both deceptive and unethical to run such an ad without a disclaimer or
explanation.
6.
It’s a reflection of the time value of money. GMAC gets to use the $500 immediately. If
GMAC uses it wisely, it will be worth more than $10,000 in thirty years.
7.
Oddly enough, it actually makes it more desirable since GMAC only has the right to pay the
full $10,000 before it is due. This is an example of a “call” feature. Such features are
discussed at length in a later chapter.
8.
The key considerations would be: (1) Is the rate of return implicit in the offer attractive
relative to other, similar risk investments? and (2) How risky is the investment; i.e., how
certain are we that we will actually get the $10,000? Thus, our answer does depend on who
is making the promise to repay.
9.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '10
 hung
 Time Value Of Money, Future Value, Net Present Value, GMAC

Click to edit the document details