The Time Value of Money (true or false)

1. Time value of money is based on the belief that people have a positive time preference

for consumption.

a. True

b. False

2. Individuals prefer to consume goods in the future rather than right away.

a. True

b. False

3. The value of money invested at positive interest rate grows over time.

a. True

b. False

4. The further in the future you receive money, the more it is worth today.

a. True

b. False

5. The higher the rate of interest, the more likely you will elect to invest your funds and

forego current consumption.

a. True

b. False

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 6. The present value technique uses discounting to find the present value of each cash flow

at the beginning of the project.

a. True

b. False

7. The future value technique uses compounding to find the future value of each cash flow

at the end of the project’s life.

a. True

b. False

8. Compound interest consists of both simple interest and interest-on-interest.

a. True

b. False

9. Compound interest consists of only interest-on-interest.

a. True

b. False

10. Compounding accelerates the growth of the total interest earned.

a. True

b. False

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 11. The higher the interest rate on an investment, the more money that is accumulated for any

time period.

a. True

b. False

12. The more frequently the interest payments are compounded, the larger the future value of

€1 for a given time period.

a. True

b. False

13. If Bank A pays interest on a monthly basis and Bank B pays the same interest on a

quarterly basis, then investing €1 000 in Bank B will lead to a higher future value than

investing the same amount in Bank A.

a. True

b. False

14. The present value is simply the current value of a future cash flow that has been

discounted at the appropriate discount rate.

a. True

b. False

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 15. The Rule of 72 allows one to calculate the approximate time needed to double an

investment.

a. True

b. False

16. The higher the discount rate, other factors remain constant, the lower the present value of

a future cash flow.

a. True

b. False

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