Terminal Value (TV)

### What is terminal value (TV)? - [x] The value of an investment at the end of an investment period, calculated at a specified rate of interest. - [ ] The initial value of an investment. - [ ] The value of an investment's annual returns. - [ ] The average value of an investment over a period. > **Explanation:** Terminal value represents the future worth of an initial investment, assuming a specific growth rate, usually calculated using compound interest. ### Which formula is used to calculate terminal value? - [ ] TV = P + rt - [ ] TV = P \times (1 + rt) - [x] TV = P \times (1 + r)^t - [ ] TV = P \times r \times t > **Explanation:** The terminal value is calculated using the compound interest formula: TV = P \times (1 + r)^t, where P is the principal, r is the interest rate, and t is the time period in years. ### If $2,000 is invested at an annual interest rate of 6% for 5 years, what is the terminal value? - [ ] $2,000 - [ ] $2,300 - [x] $2,674 - [ ] $2,718 > **Explanation:** When you invest $2,000 at 6% for 5 years, the terminal value (TV) is calculated as follows: TV = 2000 \times (1 + 0.06)^5 = 2000 \times 1.338225 = \$2,674.45. ### How does increasing the interest rate affect the terminal value? - [x] It increases the terminal value. - [ ] It decreases the terminal value. - [ ] It does not affect the terminal value. - [ ] It stabilizes the terminal value. > **Explanation:** An increase in the interest rate raises the terminal value because the investment grows at a faster rate due to compounding. ### Terminal value is most significantly affected by which of the following factors? - [x] The interest rate and the time period. - [ ] The initial principal only. - [ ] The type of investment. - [ ] The geographic location of the investment. > **Explanation:** The terminal value is predominantly affected by the interest rate and the length of the investment period due to the compound interest effect. ### What is another term often associated with terminal value in the context of business valuation? - [ ] Dividends - [x] Discounted Cash Flow (DCF) - [ ] Net Present Value (NPV) - [ ] Earnings Before Interest and Taxes (EBIT) > **Explanation:** In business valuation context, **terminal value** is frequently used in **Discounted Cash Flow (DCF)** analysis to estimate the business's value beyond the forecasted period. ### If $1,000 is invested for 10 years at an interest rate of 4% annually, what is the terminal value? - [ ] $1,000 - [ ] $1,480 - [ ] $1,644 - [x] $1,480.24 > **Explanation:** To calculate the terminal value, use the formula: TV = 1000 \times (1 + 0.04)^{10}, which equals approximately $1,480.24. ### Is terminal value relevant in short-term investment strategies? - [ ] Yes, for every investment horizon. - [x] No, it is more relevant for long-term investments. - [ ] No, it only applies to daily investments. - [ ] Yes, especially for one-year investments. > **Explanation:** Terminal value is more relevant for long-term investments, as compound interest significantly impacts the value over extended periods. ### What differentiates terminal value from present value? - [ ] Terminal value is calculated using simple interest. - [ ] Terminal value does not account for interest rate. - [x] Terminal value assesses future worth, while present value calculates current worth of future cash flows. - [ ] Terminal value is used for depreciation purposes. > **Explanation:** Terminal value estimates the future value of an investment, while present value calculates the current worth of future cash flows, discounting them at a specific rate. ### What would be the terminal value of a $500 investment at a 10% annual interest rate compounded annually for 5 years? - [x] $805.25 - [ ] $665.50 - [ ] $750.00 - [ ] $900.00 > **Explanation:** Calculating the terminal value: TV = 500 \times (1 + 0.10)^5 = 500 \times 1.61051 = $805.255. Thus, the terminal value is approximately $805.25.