...time value of money. 1. Future value of a single amount a. FV = PV X FVIF 2. Present value of a single amount b. PV = FV X PVIF c. This is to determine the present value of an amount to be received in the future. 3. Future value of an annuity d. FVA = A X FVIFA e. To determine the future value of a series of consecutive, equal payments (an annuity). 4. Present value of an annuity f. PVA= A X PVIFA 5. Annuity equaling a future value g. A = FVA ÷ FVIFA h. To determine the size of an annuity that will equal a future value. 6. Annuity equaling a present value i. A = PVA ÷ PVIFA j. Determines the size of annuity equal to a given present value. 7. Determine the yield on an investment k. PVIF = PV÷ FV (Yield – present value of a single amount) (Appendix B) l. PVIFA = PVA ÷ A (Yield- present value of an annuity) (Appendix D) m. To determine the interest rate that will equate an investment with future benefits 8. Less than annual compounding periods n. If the compounding period is more or less frequent than once a year. 9. Patterns of payment – deferred annuity o. PVA = A X PVIFA (Appendix D) p. PV = FV X PVIF (Appendix B) q. If an annuity begins in the future. For chapter 10, I learned valuation of financial assets: bonds, preferred stock and common stock. Valuation is normally based on the concept of determining the present value...
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...Abstract In this paper, Team C will discuss the concept of the time value of money and the importance of this concept in business. Also, we will provide a demonstration of the use of the formula used to calculate the present and future values of money to get the present value of $100 using different periods of time and interest rates. Time Value of Money In the world of business, it is essential to know what TVM represents and how it helps make better choices in how we spend our money. TVM is also known as Time Value of money which is a given amount of interest earned in a period of time (Wikipedia, 2011). Each member in group “C” will use 100 as our present value and we will choose an interest rate and period. Time value of money concept is used to determine present and future values of money. “The time value of money refers to the relationship between time, money, and the rate of interest.” (Letsche, 2011). The formula consist of four components FV = Future Value, PV = Present Value, i = the interestrate per period and n= the number of compounding periods (TeachMeFinance.com). In business, TVM is used to evaluate expected returns on investments and monitoring the company’s cash flow. “However, understanding the time value of money is also very important for you as an self-employed business person to make sure you are able to realize your spending, purchasing and retirement goals.” (Loughran, 2011). On a personal level, individuals can use TVM to calculate interest...
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...Time Value of Money Table of Contents Abstract………………………………………………………………………………3 Time Value of Money………………………………………………………………..4 Future Value and Present Value…………………………………………………......5 Challenges…………………………………………………………………………...6 Summation…………………………………………………………………………..8 References…………………………………………………………………………...9 Abstract Time value of money operations are the backbone of financial decisions in business. The basics of their operation lie in interest calculations that can be used to determine the value of money five years ago, today and even well into the future. These calculations can be tricky and are weighed with outside challenges that can affect them positively and negatively and give a good framework of when, where and how money should be invested and capital allocated. Time Value of Money It is generally stated that money today is worth more than the money of tomorrow. This simple statement of finance is the basis for understanding the time value of money and how it relates to opportunity costs, sunk costs, present and future values and discount rates. (Wilson, 2010). There are many factors which affect money, but predominantly inflation, risk, and opportunity loss are the factors which affect the time value of money and are the influences which directly affect a manager’s ability to understand and use financial information relating to present and future values to make sound decisions. Future Value (Fv) and Present Value (Pv) In economics, the time value...
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...2-1 a. PV- Present Value, the beginning amount. Int- Interest per year FV- Future Value or ending amount in an account where N is the number of periods the money is left in the account. PVA- Present value annuity FVA- Future value annuity and the ending value of a stream of equal payments. PMT- Payment M- Number of compounding period per year I nom- The nominal , or quoted, interest rat b. Opportunity cost rate- is the rate of return you can earn on an alternative investment of a similar risk. c. Annuity- a series of equal periodic payments for a specific number of periods. Lump sum payment- When you pay a large amount of amount due. Cash flow- annuities with their equal payments in each period Uneven cash flow stream- happens when a series of payments of annuity payments plus final lump sum. d. Ordinary annuity- an annuity whose payments occur at the end of each period. Annuity due- If payments are paid in the beginning of each period, then we have an annuity due. e. Perpetuity- is an annuity with an infinite number of payments. Consul- it promises to pay interest perpetually, they are called perpetuities. Perpetuity is a simply an annuity with an extended life. f. Outflow- the outflow of the payment when completed. Inflow- the inflow of the present value Time line- helps visualize what’s happening in a particular...
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...$2190 for 75 days at 12% interest. 3. Find the future value if $20,000 is invested at 6% for 3 months. 4. Find the present value of $1000 at 9% due 8 months from now. 5. Find the present value and the effective rate of $1000 due in 4 months at 12% interest. 6. If $500 is invested at 6% compounded annually, what will be the future value 30 years later? 7. At 8% compounded annually, how many years will it take for $2000 to grow to $3000? 8. At what interest rate compounded annually will a sum of money would be double/ triple in 10 years? 9. What is the present value of $2500 payable 4 years from now at 8% compounded quarterly/ semiannually? 10. If $100 is deposited in an account each month for 10 years and the account earns 7% compounded monthly; how much will be in the account after the last deposit is made? 11. If $500 were invested for 8 years at interest rate 6% compounded quarterly, then what will be the compound interest? 12. An investor has an opportunity to purchase two different notes: Note A pays 15% compounded monthly and Note B pays 15.2% compounded semiannually. Which is the better investment? 13. What is the present value of an annuity that pays $200 per month for 5 years if money is worth 6% compounded monthly? 14. What is the value of an annuity at the end of 20 years if $2000 is deposited each year into an account earning 8.5 % compounded annually? How much of this value is interest? 15. How much should you invest now...
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...sheet Generate a personal income and expense statement. Develop a good record-keeping system and use ratios to evaluate personal financial statements. • Construct a cash budget and use it to monitor and control spending. • Apply time vale of money concepts to put a monetary value on financial goals. • • • • © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Mapping Out Your Financial Future Financial planning facilitates: • Greater Wealth • Financial Security • Attainment of Financial Goals © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Interlocking Network of Financial Plans and Statements © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet A statement of your financial position at a given point in time Balance Sheet Equation Assets: Things You Own • Liquid assets – low-risk, cash or investments that can be converted to cash with little or no loss in value • Investments – acquired to earn a return • Real property – immovable property including land or a house • Personal Property – movable property such as autos and home furnishings Liabilities: Money You Owe • Classification by Maturity – Current or short-term — due within...
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...the future value of money in which interest is calculated on the cumulative principal and interest earned up to that point. 2. What is the future value of $10,000 for an interest rate of 16% and 1 annual period of compounding? for an annual interest rate of 16% and 2 semiannual periods of compounding? for an annual interest rate of 16% and 4 quarterly periods of compounding? The future value of $10,000 with an interest rate of 16% and 1 annual period of compounding is $11,600.00. The future value of $10,000 with an interest rate of 16% and 2 semiannual periods compounding is $11,664.00. The future value of $10,000 with an interest rate of 16% and 4 quarterly periods compounding is $11,698.59. 3. Define an annuity. A series of equal cash flows made or received at regular time intervals. 4. Define an ordinary annuity. A series of payments made or received at the end of each period. 5. Define an annuity due. An annuity with n payments, where the first payment is made at time t = 0, and the last payment is made at time t = n - 1. 6. In the future value annuity table at any interest rate for 1 year, why is the future value interest factor of this annuity equal to 1.00? In a future value annuity table at any interest rate for 1 year, the future value interest factor of the annuity is equal to 1.00 because no interest has been acquired. 7. What is the relationship between the present value of single dollar payment formula and the present value...
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...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...
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...SOLVING TIME VALUE OF MONEY PROBLEMS I. Single (Annual) Compounding Period Examples A. Future Value (FV) of a Single Current Lump Sum Received One Period Hence FV = PV(1+i) | PV: current (or present) value | | i: a given interest rate (or rate of return) | (If the tables are used, this is the related formula: FV = PV * FVIF Equation 2 in the Week 1 Lecture) Example: You place $100 today in a bank deposit account that pays 10% annual interest. In other words, interest on your $100 worth of principal is paid once a year and will be received one year from today. What will your deposit account be a year from today? Algebraically, the relationship is: FV = $100(1.1) = $110 Using Excel, try entering the following formula into a single spreadsheet cell (hit the "Enter" key on your keyboard after typing in the formula): =100*1.1 If you entered the formula correctly, the cell will display a value of 110. As an aside, while Excel contains numerous shortcuts for present- and future-value calculations, we will not consider these shortcuts for two reasons. First, they do not promote a thorough conceptual understanding of the algebraic processes that necessarily are involved; second, these shortcuts may not (under a variety of circumstances) accurately reflect the modeling required for the more complex cash flow processes that occur under real world conditions. B. Future Value (FV) of a Current Single Lump Sum Compounded Once Each Period for Multiple Periods FV...
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...MACQUARIE UNIVERSITY ACST101 : Techniques and Elements of Finance FORMULAE FOR USE IN EXAMINATIONS 1 Future value at simple interest S = P(1 + rt) 2 Present value at simple interest P = S(1 + rt)−1 3 Present value at simple discount P = S(1 − dt) 4 Future value at compound interest S = P(1 + i)n 5 Present value at compound interest P = S(1 + i)−n 6 Future value of n payments of R at compound rate i (1 + i ) n − 1 i S = Rsn| = R i 7 Present value of n payments of R at compound rate i 1 − (1 + i ) − n i P = Ran| = R i 8 Approximation to bond or debenture yield for given price 1 I + n (C − P ) i ≈ 1 (C + P) 2 9 Present value of an annuity with payments increasing in arithmetic progression P = R[(1 + i)−1 + 2(1 + i)−2 + ... + n(1 + i)−n] (1 + i )a i − n(1 + i ) − n n| = R i 10 Future value of an annuity with payments increasing in arithmetic progression (1 + i )s i − n n| S = R i 11 Present value of an annuity with payments increasing in geometric progression P = R[(1 + i)−1 + (1 + r)(1 + i)−2 + ... + (1 + r)n−1(1 + i)−n] = R(1 + r)−1 a j where j = i − r n| 1 + r 12 Future value of an annuity with payments increasing in geometric progression j S = R(1 + r)n−1 sn| where j = i − r 1 + r...
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...BSA 2-14 Group 6 : Time Value of Money Quiz 1-2 .What are the two basic types of annuities? 3. What type of basic annuity is always greater in value (present or future) of an identical situation? Problems (3pts each) 1.Find the future value of an annuity of Php 500.00 payable at the end of each 3 months for 8 years, if money is worth 12%, compounded quarterly. 2.A fund is to be formed by the costing Php 5000.00 at the beginning of each3 months for 8 ½ years . If money is worth 10% compounded quarterly, find how much is in the fund at the end of the term? 3.Determine the maturity value of a note having a face value of Php 12,400.00 and bears interest at 11% compounded semi-annually in 5 years. 4. What is the present value of an annuity due in which payments of Php 600.00 each are to be made at the beginning of each month for 5 years, if money is worth 9% compounded monthly? Answer: 1.Ordinary Annuity 2.Annuity Due 3.Annuity Due Problems 1. FV = CF x{[(1+r)n-1]/r} , r=.12/4 n=(4)(8) = 500 x {[(1+.03)32-1]/.03} = Php 26251.38 2. FV = CF x {[(1+r)n-1]/r} (1+r), r=.10/4 n=(4)(8.5) = 5000 {[(1+0.025)34-1]/0.025}(1+.025) =Php 269,641.04 3. FV=CF(1+r)n ,n=2(5) ,r=.11/2 =(12400)(1+.055)10 =Php 21,180.99 4. PV= CF x {[1-(1+r)-n]/r}(1+r) , r=9%/12 , n=(12)(5) = 600 x {[1-(1+0.0075)-60]/0.0075}(1+0.0075) = Php...
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...MEMORANDUM FOR CEO FROM: CFO SUBJECT: Time Value of Money 12 OCT 13 This memo accompanies the Excel Spreadsheet labeled Case FIN 50 and is intended to explain the significance of the various formulae and how our decisions with finances affect our bottom line numbers. Every Time Value of Money Problem has either four or five variables, we typically will know three to four of these variables and thus will only need to solve for the one remaining variable. Lump Sum Present Value Any time we take an amount of money and receive an annual rate of return on it, we should see a standard/preset growth on the initial amount. As you can see under “required calculation #1”, we have two columns addressing two amounts of money: $100,000 and $200,000. As you can see, the rate and the number of years the rate is compounded has a dramatic affect on the required initial investment. The higher the rate and the longer the investment compounds, the less the required initial investment. Lump Sum Future Value If we were to invest a specific amount of money today, in theory it should grow to a larger value at some point in the future. The value at the future point in time is called the future value. In order to calculate the future value, we have to know the rate at which the investment will grow. This rate is referred to as the interest rate. We then must know the length of time that the investment will be held or the number of periods. Much like in the Present Value explanation above, the longer we are...
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...for correct formula. Please consult your syllabi for assignment grading criteria. 1. What is the stock’s value? In order to determine the stock’s value. I used the formula in the text E(P0)= D0 x [1 + E(g)] / R(Re) – E(g). In which D0 represents the most recent dividend, which has already been paid = $, E(g) represents the expected growth rate in dividends in the future=5%, and R(Re) represents the expected rate of return on the stock=15%. Therefore the formula is as follows: E(P0)= $2.00 x [1 + .05] / .15 - .05= E(P0)=$2.00 x 1.05 / .10= E(P0)= $2.10 / .10= $21.00 The stock’s value is $21.00 2. Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13%. Under these conditions, what is the stock’s value? The formula used above would again be used in this situation, however the R(Re) which represents the expected rate of return on the stock now=13%. Therefore the formula is now as follows: E(P0)= $2.00 x [1 + .05] / .13 - .05= E(P0)=$2.00 x 1.05 / .08 E(P0)= $2.10 / .08= $26.25 The stock’s value is $26.25 3. Return to the original 15% required rate of return and assume a dividend growth rate estimate increase to 7% per year, what is the stock value? The formula used above would again be used in this situation, however the E(g) which represents the expected growth rate in dividends in the future is now increased to=7%. Therefore the formula is now as follows: E(P0)= $2.00 x [1 + .07] / .15 - .07=...
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...Time Value of Money I recently opened a Roth IRA account in 2014. Being in my 30’s already, I got started a tad bit late but nonetheless I’m planning for my retirement now. My main focus is to maximize contribution each year and allow for it’s steady growth so that I can afford to sustain my lifestyle after I retire. I plan to save at least a million dollar for my retirement. Although there are not any tax deduction provisions for Roth IRA, the earnings are tax-free. So, in the long run it will be beneficial, as I don’t have any plans to withdraw the money until I retire. I opened the Roth IRA account with $3500 at the end of 2014 at the age of 30. I intend to contribute $3500 at end of every year till the age of 65 years, which will be my retirement age. The annual expected return from investment is 7%. Since, I will be making a series of equal payments at fixed intervals for a specified number of time and doing it at the end of every year, the future value will be- PMT= $ 3500 I=7% N=35years FVA=? FVA=PMT [(1+I)^N-1÷I] FVA= 3500[(1+0.07)^35-1÷0.07] = $483829.10 So, if I stick to my current plan, I will only be able to save $483,829 at the age 65. Lets assume if I fulfill the maximum contribution of $5500 each year with same expected annual return of 7%, then my savings will be- PMT= $ 5500 I=7% N=35years FVA=? FVA=PMT [(1+I)^N-1÷I] FVA= 5500[(1+0.07)^35-1÷0.07] = $760302.83 It looks like although I make maximum contribution each year, I won’t...
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...Financial concepts are greatly important when determine which would be the best method to use for the firm or personal use. Some financial concepts are time value of money, risk and return, and interest rates. The activity of the assignment is to determine which options are best for the individual if the individual were given three alternatives of his or her inheritance; taking the $5,000 now, $1,000 for the next eight years, or taking a $12,000 at the end of the eight years. Assume that the individual can earn 11 percent interest annually. First, determine which what formulas will need to apply based on the way cash is being received. Perform the necessary calculations and determine which inheritance alternative would be best and why? Second, would he or she decision be different if he or she can earn interest at 12 percent? Without a proper calculation of the funds, decisions can be misconception. Receiving $5,000 cash now sound great and then invest for eight eights with 11 percent interest for the eight years. On the other hand, receiving $1,000 for the next eight years seems to be a little long and the amount is not that amazing but that $1,000 can be as large by the end of the eight years because the interest received increase each year—higher deposit at year two. For example, at year one, he or she invests $1,000 times that by the 11 percents interest rate will equal to $1,110 for the first year. For the second years, the interest will be calculate base...
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