BUSN 5200
Homework Assignment for Week 6:

1. Why do we say money has time value? When speaking of time value of money, it refers to the fact that money to be received or paid at different times is worth different amounts as time moves forward.

2. Why is it important for business managers to be familiar with time value of money concepts? This is important for managers to understand because they are expected to maximize the value of todays and all future dollars. Understanding money has a different value at different times will help them make better decisions for future business.

3. Define Present Value. Present value tells us what future money would be worth if we had that money today.

4. Define Future Value. Future value is the value of the item or cash at a specific time/date in the future.

5. What are present value and future value interest factors? (as in PVIF and FVIF) - PVIF is the factor that can be used to make calculations for finding the present value of a series of values. PVIF = FV (1/(1+r)t ) - FVIF is used to calculate the future value of an amount per dollar of its present value with considerations of interest. FVIF = PV ( (1+r)n – 1 / r)

6. (calculating future value) You buy a 6 year, 8% CD for $1,000. Interest is compounded annually. How much is it worth at maturity? r = .08 n = 6 PV = 1,000 FV = $1,586.87***

7. (calculating present value) What's the present value of $1,000 to be received in 8 years? (Your required rate of return is 7% a year.) r = .07 n = 8 FV= 1,000 PV = $580 ***

8. (calculating the rate of return) A friend promises to pay you $600 two years from now if you loan him $500 today. What interest rate is your friend offering you? Rate of return is r = (FV/PV) (1/n) -1 PV = $500 FV = 600 n = 2 r = 9.54%***