RW5eCh05RR - CHAPTER 5 INTRODUCTION TO VALUATION THE TIME...

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CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY 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’s a reflection of the time value of money. Scotia Mcleod gets to use the $29.19 immediately. If Scotia uses it wisely, it will be worth more than $100 in thirty years. 6. 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.
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