1. The time value of money is the opportunity cost of passing up the earning potential of...

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Question:

1. The time value of money is the opportunity cost of passing up the earning potential of a dollar today.

2. A rational investor would prefer to receive $1,200 today rather than $100 per month for 12 months.

3. A timeline identifies the timing and amount of a stream of cash flows, along with the interest rate it earns.

4. Timelines are used for simple time value of money problems, but cannot be used for more complex problems.

5. If you only earned interest on your initial investment, and not on previously earned interest, it would be called simple interest.

6. An investment earning simple interest is preferred over an investment earning compound interest because the simplicity adds value.

7. When using a financial calculator, cash outflows generally have to be entered as negative numbers, because a financial calculator sees money "leaving your hands."

8. $10,000 invested at 10% per year for 5 years earns interest equal to $6,105.10; therefore, $10,000 invested at 10% per year for 10 years will earn interest equal to $12,210.20 (2 times $6,105.10).

9. When solving time value of money problems on a financial calculator, you must select the "end mode" when you enter the final years cash flow.

10. When solving a problem involving an annuity due, you must select the "beg" or beginning mode on your financial calculator.

11. Accounting profits is the most relevant variable the financial manager uses to measure returns.

12. Cash flows is the most relevant variable to measure the returns on debt instruments, while GAAP net income is the most relevant variable to measure the returns on common stock.

13. The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

14. Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

15. Another name for an asset's expected rate of return is holding-period return.