Multiple Choice
The expected amount of time to recover the initial amount of an investment is called the:
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10. Time Value of Money
Time Value of Money Equations
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The process of restating future cash flows in today's dollars is known as:
A
Compounding
B
Accrual
C
Amortization
D
Discounting
Verified step by step guidance1
Understand the concept of 'Discounting': Discounting is the process of determining the present value of future cash flows by applying a discount rate. It helps in evaluating the worth of money to be received in the future in today's terms.
Identify the formula for present value (PV): The formula for discounting future cash flows is PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of periods.
Recognize the difference between discounting and other terms: Compounding refers to the process of growing a present value into a future value, accrual involves recognizing revenues and expenses when they are incurred, and amortization is the gradual reduction of a debt or asset value over time.
Apply the concept of discounting in financial decision-making: Discounting is used in various financial analyses, such as net present value (NPV) calculations, investment appraisals, and determining the value of bonds or loans.
Relate discounting to the time value of money principle: The time value of money states that a dollar today is worth more than a dollar in the future due to its earning potential. Discounting quantifies this principle by adjusting future cash flows to their present value.
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