Time Value of Money: Name: Professor’s Name: Institution: Course Title: Date: Introduction Time Value of Money is the concept that a certain amount of money has a different value today than it would in the future. It is explained as the idea that money at hand at the present time is worth much more than the equal amount would in future (Crosson, 2008). If you lend your friend money today, most likely he will refund the same amount you lend him in future. That money
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Module 2 Problems 1) $546.39 2) $500.00 3) $331,315.11 4) $1,407.84 5) $4,178,631.90 Module 2 Questions 1) The earning of interest on interest is called compounding. Money that is deposited in savings accounts is frequently referred to as being compounded, for interest is earned on both the principal and the previously earned interest. 2) Discounting is basically the process of determining the difference between face value (or future value) and the present value
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ALTERNATIVE PROBLEMS AND SOLUTIONS ALTERNATIVE PROBLEMS 5-1A. (Compound Interest) To what amount will the following investments accumulate? a. $4,000 invested for 11 years at 9% compounded annually b. $8,000 invested for 10 years at 8% compounded annually c. $800 invested for 12 years at 12% compounded annually d. $21,000 invested for 6 years at 5% compounded annually 5-2A. (Compound Value Solving for n) How many years will the following take?
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N, i%, PV, PMT, FV, CHS (-ve), g=BEG, g=END, CL Ch 3&4- Time Value of Money 1. –Future Value:Amount into which an investment 2. will grow after earning interest for a given period 3. of time. 4. 1. Single Cashflow: * - Compounding to FV = PV(1 + i%)n * - Discounting to PV = FV (1 + i%)- n * 2. Annuities:Series of EQUAL CFs at regular * periods/Intervals. * -Special case: Bonds/Loans(personal, business, * mortgages)/ Life insurance
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Present value is where the value on a set date of a future payment is discounted to reflect the time value of money and other factors. This can also apply to a series of future payments. Present value calculations are commonly utilized in business and economics to provide a way to compare cash flows at different times. Present value can be described as the current worth of a future sum of money or stream of cash flows given a specified rate of return. (http://www.getobjects.com) Future cash flows
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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
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MERCURY ATHLETIC FOOTWEAR Problem statement: West Coast Fashions, Inc a large business of men’s and women’s apparel decided to dispose of one of their segments; Mercury Athletic. John Liedtke, head of the business development for Active Gear, Inc saw it has a possible opportunity for them to acquire it. The footwear industry is very competitive, with low growth and stable profit margins. AGI is very profitable but it is smaller than its competitors, which is becoming a disadvantage. Therefore
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Compound growth rates are exponential over time. Explain. Growth rates, as well as interest rates, are not linear, but rather exponential over time. In other words, the growth rate of the invested funds is accelerated by the compounding of interest. Over time, the principal amount you receive interest on will get larger with compounding, thus generating higher interest payments 5.9 What is the Rule of 72? This is a rule of thumb to determine how fast an investment can double. It is a rule
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all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows? a. The discount rate decreases. b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same. c. The discount rate increases. d. Answers b and c above. e. Answers a and b above. . Which of the following statements is most correct? a. If the discount (or interest) rate is
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1. What is the difference between simple interest and compound interest? Simple Interest only calculates the interest on the principal in each period. Compound interest calculates 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
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