Time Value of Money Overview
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Questions and Answers

What is one primary difference between crowdfunding and traditional venture capital fundraising?

  • Venture capitalists invest in established companies only.
  • Crowdfunding involves private businesses asking many people for small donations. (correct)
  • Crowdfunding is only available for non-profit organizations.
  • Crowdfunding requires larger sums from a few investors.

Business incubators provide resources and space to help new businesses develop their products.

True (A)

What do grants and subsidies have in common?

Both provide financial assistance to businesses, but grants do not typically need to be repaid.

Loans are typically advanced to the borrower by a __________.

<p>lender</p> Signup and view all the answers

Match the following funding sources with their descriptions:

<p>Crowdfunding = Small donations from many people Grants = Financial assistance that does not need to be repaid Loans = Advanced funds subject to repayment conditions Subsidies = Direct contributions and assistance from the government</p> Signup and view all the answers

What is the most common form of funding for small and medium-sized businesses?

<p>Loans (C)</p> Signup and view all the answers

Subsidies are always in the form of cash payments.

<p>False (B)</p> Signup and view all the answers

The first step in setting a pricing policy is to select the __________ objective.

<p>pricing</p> Signup and view all the answers

What does a high price generally convey about a product?

<p>It is of higher quality or value. (C)</p> Signup and view all the answers

Setting prices too low will make a product appear high-quality.

<p>False (B)</p> Signup and view all the answers

What relationship exists between price and demand according to the content?

<p>Normally inverse relationship.</p> Signup and view all the answers

Which of the following is NOT a source of startup financing?

<p>Public relations (C)</p> Signup and view all the answers

__________ costs do not vary with the level of production or sales revenue.

<p>Fixed</p> Signup and view all the answers

The Time Value of Money (TVM) concept states that a dollar received today is worth more than a dollar received in the future.

<p>True (A)</p> Signup and view all the answers

What is indicated by consumers when they see a higher price on a product?

<p>The product is likely to be of better quality. (D)</p> Signup and view all the answers

What must businesses consider when setting prices for their products?

<p>Costs of production, distribution, sales, and desired profit.</p> Signup and view all the answers

What are the 8 Ps of Marketing?

<p>Product, Price, Place, Promotion, People, Process, Physical evidence, Performance.</p> Signup and view all the answers

Variable costs are fixed and do not depend on production levels.

<p>False (B)</p> Signup and view all the answers

The marketing __________ involves planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services.

<p>mix</p> Signup and view all the answers

Match the pricing strategies to their effects.

<p>High price = Often perceived as high quality Low price = May suggest cheapness Demand has an upward slope = Indicates luxury perception Fixed costs = Remains constant regardless of output</p> Signup and view all the answers

Match the following marketing terms with their definitions:

<p>Public Relations = Communication strategy to manage public perception Sales Promotion = Short-term incentives to encourage purchases Advertising = Paid promotion of products or services Market Development = Strategy to enter new markets with existing products</p> Signup and view all the answers

Which of the following best describes the main purpose of advertising?

<p>To persuade customers to buy (B)</p> Signup and view all the answers

The promotional mix includes advertising, sales promotion, public relations, and personal selling.

<p>True (A)</p> Signup and view all the answers

In a business context, __________ refers to the strategies used for engaging with stakeholders and the public.

<p>public relations</p> Signup and view all the answers

What is the time value of money (TVM) principle?

<p>The money you have today can earn profit over time. (C)</p> Signup and view all the answers

According to the TVM principle, receiving P100,000 today is worth less than receiving P50,000 for two years.

<p>False (B)</p> Signup and view all the answers

Which pricing strategy involves setting a low initial price to quickly attract many buyers?

<p>Market-Penetration Pricing (C)</p> Signup and view all the answers

What is the formula to calculate future value (FV) using the present value (PV), interest rate (i), and time (t)?

<p>FV = PV x (1 + (i/n))^(nt)</p> Signup and view all the answers

Value pricing is solely about reducing prices to attract customers.

<p>False (B)</p> Signup and view all the answers

What is the main characteristic of Everyday Low Pricing (EDLP)?

<p>Constant prices without week-to-week price changes</p> Signup and view all the answers

The value of money can increase over time through __________.

<p>investment</p> Signup and view all the answers

In going-rate pricing, businesses mainly base their prices on competitors' prices rather than their own __________ or __________.

<p>demand, costs</p> Signup and view all the answers

Match the variables in the time value of money to their meanings:

<p>PV = Present value of money i = Interest rate or return t = Number of years n = Compounding periods per year</p> Signup and view all the answers

Which pricing strategy is used when distinguishing between products in a product line?

<p>Product Line Pricing (D)</p> Signup and view all the answers

If P100,000 is invested at a 20% annual interest rate compounded monthly, what would its future value be after 2 years?

<p>P148,691.46 (A)</p> Signup and view all the answers

Investing money typically leads to higher opportunity costs compared to holding onto the money.

<p>True (A)</p> Signup and view all the answers

Market skimming is effective only if enough buyers are willing to pay the high initial price.

<p>True (A)</p> Signup and view all the answers

What is one financial decision that understanding TVM can help a person make?

<p>Choosing between job salary terms.</p> Signup and view all the answers

What is the goal of value pricing for businesses?

<p>To retain customers by providing good product value</p> Signup and view all the answers

Match the following pricing strategies with their descriptions:

<p>Value Pricing = Fair prices for high-quality goods Everyday Low Pricing = Constant prices avoid uncertainty Going-rate Pricing = Basing prices on competitors Market Skimming Pricing = High initial prices to capture revenue</p> Signup and view all the answers

What is an example of Razor-and-Blade pricing?

<p>Purchasing a smartphone at a low price and buying accessories separately (A)</p> Signup and view all the answers

International pricing is only determined by a country's economic conditions.

<p>False (B)</p> Signup and view all the answers

What is promotional pricing designed to create?

<p>Buying excitement and urgency</p> Signup and view all the answers

A common example of product bundle pricing is a fast food restaurant's _____ meal combo.

<p>value</p> Signup and view all the answers

Which of the following is NOT a form of promotional pricing?

<p>Budget pricing (A)</p> Signup and view all the answers

Match the pricing strategy with its description:

<p>Optional-Product Pricing = Lower price on main products to sell additional products Product Bundle Pricing = Combining products for a reduced package price Promotional Pricing = Temporary price reductions to create urgency International Pricing = Pricing based on varying factors in different countries</p> Signup and view all the answers

Limited-time offers are used to create a sense of urgency among buyers.

<p>True (A)</p> Signup and view all the answers

What should businesses consider when selecting a final price for their product?

<p>Impact of other marketing activities, pricing policies, and gain-and-risk-sharing pricing</p> Signup and view all the answers

Flashcards

Time Value of Money (TVM)

The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Present Value (PV)

The current worth of a future sum of money or stream of cash flows given a specified rate of return.

Interest Rate

The percentage rate charged or paid for the use of money.

Number of Years (t)

Time period considered for calculating future value.

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Future Value (FV)

The value of an asset or cash flow at a specific date in the future, based on an assumed rate of growth.

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Opportunity Cost

The potential benefits an individual, investor, or business misses out on when choosing one alternative over another.

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Compounding Periods (n)

The frequency at which interest is calculated and added to the principal (e.g., annually, monthly, daily).

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Investment Returns

Profits earned from an investment (e.g., stocks, real estate.

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Crowdfunding

A method of raising small amounts of capital from many people, typically for a new business.

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Business Incubators

Shared spaces and resources to help startups and new businesses develop and test products.

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Grants

Money given for a specific purpose that doesn't need to be paid back.

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Subsidies

Financial assistance (tax breaks or direct contributions) to help cover operating costs.

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Loans

Money borrowed with a repayment plan including interest and fees.

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Pricing Objective

The goal a business has when setting prices for its products or services.

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Pricing Policy

The set of rules and procedures a business uses for setting prices.

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New Product Pricing

Determining the price for a newly developed product.

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Value Pricing

Setting prices based on the perceived value of a product, considering factors like performance, quality, and customer support.

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Everyday Low Pricing (EDLP)

A pricing strategy where retailers maintain consistent prices for products, eliminating frequent promotions and price fluctuations.

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High-Low Pricing

A strategy where retailers charge higher prices on a daily basis but offer frequent promotions with temporarily lower prices.

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Going-Rate Pricing

A pricing strategy where businesses set their prices based on the prices of their competitors.

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Market-Skimming Pricing

Setting a high initial price for a new product to maximize profit from early adopters before lowering prices over time.

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Market-Penetration Pricing

Setting a low initial price for a product to attract a large customer base quickly and gain market share.

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Product Line Pricing

A pricing strategy where businesses offer similar products in a line at different price points, creating different quality perceptions.

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What is the key difference between EDLP and high-low pricing?

EDLP maintains consistent prices, while high-low pricing uses frequent promotions to offer temporary discounts.

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Price and Value

The perceived worth of a product, which influences its pricing. Higher-priced goods are usually associated with higher quality, while lower prices may indicate lower quality. This perception affects customer purchasing decisions.

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Ideal Price

A price point that balances customer affordability and product value, making it attractive compared to competitors. This price encourages customers to choose the product over alternatives.

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Demand Curve

A graph showing the relationship between price and demand. Generally, as the price rises, demand decreases. However, luxury goods might show an upward slope as higher prices are perceived as a sign of high quality.

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Fixed Costs

Costs that do not vary with production levels or sales revenue. Examples include rent, utilities, salaries, and interest.

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Variable Costs

Costs that change directly with the level of production. As output increases, these costs also increase.

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Demand

The consumer's desire and willingness to pay a specific price for goods and services. It is a key factor that impacts business marketing objectives.

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Cost Ceiling vs. Demand Floor

Costs set a minimum price a business can charge to cover production expenses, while demand sets a maximum price customers are willing to pay.

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Pricing Strategy

A comprehensive plan for setting prices for products or services. It involves considering factors like costs, demand, competition, and target market.

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Optional-Product Pricing

A pricing strategy where businesses sell main products at lower prices than usual, relying on sales of optional products to make up the difference. This is often referred to as "razor-and-blade" pricing, where the main product (razor) is priced low to encourage sales of the complementary product (blades).

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Product Bundle Pricing

Combining two or more products into a package and selling them at a discounted price compared to buying them separately. This strategy encourages customers to buy more products and increases sales.

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International Pricing

Setting prices for products in different countries, considering factors like local economic conditions, competition, laws, regulations, and distribution channels.

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Promotional Pricing

Reducing prices for a short period to create excitement and urgency among customers. This can take various forms like special event pricing, limited-time offers, and rebates.

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Special-Event Pricing

Lowering prices during specific events or seasons to attract more customers and boost sales.

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Limited-Time Offer Pricing

Creating urgency by offering promotional deals with time constraints, like online flash sales, free shipping, or discount codes.

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Rebates

Providing cash-back incentives to customers based on the value of their purchase. Businesses use this to increase sales volume.

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Gain-and-Risk-Sharing Pricing

A pricing strategy where the business shares the risk and potential gain with the customer. This can involve flexible payments or performance-based pricing.

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What are the 8 Ps of Marketing?

The 8 Ps of Marketing are a framework used to develop and execute effective marketing strategies. They are: Product, Price, Place, Promotion, People, Process, Physical Evidence, and Productivity.

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What is a Market Development Strategy?

A strategy that aims to identify and target new markets for existing products or services. It involves finding new customer segments, geographic regions, or product applications.

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What is the Promotional Mix?

The combination of marketing communication tools used to reach a target audience. It includes advertising, public relations, sales promotion, direct marketing, and personal selling.

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Public Relations (PR)

The strategic communication process that builds mutually beneficial relationships between organizations and their publics. This involves managing the public image and communicating positive stories.

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Sales Promotion

Short-term incentives offered to encourage immediate purchase of goods or services. This can include discounts, coupons, contests, or free samples.

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What is the Time Value of Money (TVM)?

The concept that money available today is worth more than the same amount of money in the future due to its potential earning capacity. This takes into account the opportunity cost and the potential for returns over time.

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What is a Pricing Objective?

The specific goal a business aims to achieve through its pricing strategy. This can include maximizing profit, increasing market share, or building brand image.

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What is a Pricing Policy?

A set of rules and procedures a business uses to determine the prices of its products or services. This can include cost-plus pricing, value-based pricing, or competitive pricing.

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Study Notes

Time Value of Money

  • Time value of money (TVM) is the concept that money available today is worth more than the identical sum in the future due to its potential earning capacity.
  • P100,000 today is worth more than P100,000 received in two years.
  • TVM allows you to determine which investment options provide the most optimal rate of return given the timeframe of an investment.

Future Value Formula

  • Future Value = Present Value x (1 + interest rate)^ (number of years x number of compounding periods per year)
  • PV: Present value of money
  • i: Interest rate or return
  • t: Number of years
  • n: Number of compounding periods of interest per year

Example of TVM

  • Investing P100,000 at a 20% annual interest rate, compounded monthly for 2 years.
  • Future Value = 148,691.46
  • This means P100,000 today will be worth 148,691.46 in two years. Forgoing the investment over that timeframe would mean forgoing P48,691.47 in interest.

Revenue Generation Models

  • Personal Investment: Individuals invest in financial instruments like stocks, bonds, real estate, etc.
  • Love Money: Money given to loved ones, repaid as business profits increase.
  • Venture Capital: Wealthy investors finance startups with potential long-term growth in exchange for company shares.
  • Angels: Wealthy individuals (or executives) invest directly in startups, offering expertise and managerial support.
  • Crowdfunding: Businesses raise money from the general public in exchange for equity in the company.
  • Business Incubators: Startups share spaces, resources, and networks with established businesses to help them grow faster.
  • Grants and Subsidies: Government funds for businesses to offset operating costs.
  • Loans: Funds provided by lenders to businesses, typically with terms and conditions.

Basic Pricing Strategies

  • Price is a critical factor in influencing consumer choice, requiring careful consideration of the business, market competition, brand positioning and target market.
  • Price selection involves a series of steps:
    • Identifying the pricing objective.
    • Evaluating customer perception of value.
    • Ensuring customer confidence
    • Establishing a demand curve (Price vs Demand).

Pricing Methods

  • Markup pricing: Adding a standard markup to the cost of the product to determine the selling price.
  • Target-return pricing: Determining the price at which target rate of return on investment is achieved
  • Perceived-value pricing: Setting prices based on the customer’s perceived value of the product, considering quality, service and other intangible attributes
  • Value pricing: Balancing quality and price to create a strong overall value proposition

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Time Value of Money PDF

Description

This quiz covers the concept of the Time Value of Money (TVM), explaining why money today is worth more than the same amount in the future. Learn about the Future Value formula and apply it through examples to understand investment options and optimal returns.

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