Unit 5 Finance Concepts

Flashcards covering key concepts related to opportunity cost, risk, IRR, NPV, and time value of money in finance.

Opportunity cost is the rate of return we should expect to earn on an investment given our __.

Alternatives.

The First Principle of Finance states that the closer to the present an amount is, the __ its value to us.

Higher.

The Internal Rate of Return (IRR) is the rate of return earned on an __.

Investment.

A positive Net Present Value (NPV) means an increase in wealth expressed in __ dollars.

Today's.

Risk affects the opportunity cost used in __ decisions.

Economic.

NPV directly evaluates the __ ability of an asset.

Wealth-creating.

Economic assets function as stores of __ and have ownership rights enforced by institutions.

Value.

The opportunity cost has two components: the risk-free rate of return and a __ premium.

Risk.

The time value of money means that money available now is worth more than the same sum in the __.

Future.

Accept an investment if its IRR exceeds its __ cost.

Opportunity.

Risk is the possibility of getting a lower rate of __ than expected.

Return.

The extra return above the risk-free rate required due to uncertainty is called the __ premium.

Risk.

Present value is the value of a future cash flow stated as of __.

Today.

Creating wealth occurs when the price paid for an asset is less than its __ value.

Economic.

Risk-free rate of return is the return on an asset with __ future cash flows.

Certain.

Opportunity cost is the rate of return we should expect to earn on an investment given our __.\n\n

Alternatives.\n\n

The First Principle of Finance states that the closer to the present an amount is, the __ its value to us.\n\n

Higher.\n\n

The Internal Rate of Return (IRR) is the rate of return earned on an __.\n\n

Investment.\n\n

A positive Net Present Value (NPV) means an increase in wealth expressed in __ dollars.\n\n

Today's.\n\n

Risk affects the opportunity cost used in __ decisions.\n\n

Economic.\n\n

NPV directly evaluates the __ ability of an asset.\n\n

Wealth-creating.\n\n

Economic assets function as stores of __ and have ownership rights enforced by institutions.\n\n

Value.\n\n

The opportunity cost has two components: the risk-free rate of return and a __ premium.\n\n

Risk.\n\n

The time value of money means that money available now is worth more than the same sum in the __.\n\n

Future.\n\n

Accept an investment if its IRR exceeds its __ cost.\n\n

Opportunity.\n\n

Risk is the possibility of getting a lower rate of __ than expected.\n\n

Return.\n\n

The extra return above the risk-free rate required due to uncertainty is called the __ premium.\n\n

Risk.\n\n

Present value is the value of a future cash flow stated as of __.\n\n

Today.\n\n

Creating wealth occurs when the price paid for an asset is less than its __ value.\n\n

Economic.\n\n

Risk-free rate of return is the return on an asset with __ future cash flows.\n\n

Certain.\n\n

The primary goal of financial management is to maximize __ wealth.

Shareholder

__ value is the value of an asset or cash at a specified date in the future.

Future

The rate used to bring future cash flows back to their present value is known as the __ rate.

Discount

Generally, investments with higher expected risk require a higher expected __.

Return

Economic value is often determined by the interaction of supply and demand in __.

Markets