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
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of a larger company or he may choose to improve his production with the use of technological advances. Through technology, such as the use of computerized cutting instruments that will improve the accuracy of the cuts and allows for less production time it would allow the Guillermo Furniture Company to increase profit and a low cost per piece. Another alternative is to form a partnership with a competitor not yet
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Review of time value of money Simple interest Example: A firm borrows $1,000 for a year at 10% simple interest per year. How much must the firm repay after one year? FV = future value = 1,000(1+r) = 1,000 (1.1) =1,100 What if the loan is for 3 years, at compound interest of 10% per year? If compounding is annual: FV = 1,000 (1+r)3 = 1,000 (1.1)3 = 1,331 3 Review of time value of money In general, FV = PV (1+r)t = PV * FVIF (r, t) FVIF = future value interest factor
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1. How do you explain the use of time value of money (TVM) in business? The principle of the Time Value of Money indicates that “a dollar today is worth more than a dollar received a year from now because a dollar today can be invested and earn interest.” This is an extremely significant theory in business in view of the fact that financial managers when undertaking new investments have to support their decision about whether or not this investment will add value to the firm and hence accomplish
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A. increasing payments paid for a definitive period of time B. increasing payments paid forever C. equal payments paid at regular intervals over a stated time period D. equal payments paid at regular intervals of time on an ongoing basis E. unequal payments that occur at set intervals for a limited period of time 2. Which one of the following accurately defines a perpetuity? A. a limited number of equal payments paid in even time increments B. payments of equal amounts that are paid irregularly
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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
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No concrete decision criteria to indicate whether an investment increases the firm's value 2. Ignores cash flows beyond the payback period 3. Ignores the time value of money 4. Ignores the risk of future cash flows Discounted Payback Period Advantages Disadvantages 1. No concrete decision criteria that indicate whether the investment increases the firm's 1. Considers the time value of money value 2. Considers the riskiness of the project's 2. Requires an estimate of the cost of capital
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percentage rate. An example of this is Kim is taking out a loan on a house and the annual percentage rate is 4.2%. A different example would be Lisa is taking out a loan on a car and the annual percentage rate is 2.99%. A third example is Travis deposited money into his savings account accumulating interest at a rate of 2.8% semi-annually. 2. Computing loan payments and balances requires that the quoted rates match up with the number of periods. One example is buying something on a credit card. The annual
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investment. One of these effective methods is the calculation of the net present value. The second most effective method would be the calculation of the internal rate of return. There are also other useful methods as well, for example, the payback rule and the profitability index. Many business owners use the above procedures to help them in their decision making of acquiring other businesses. The Net Present Value is important to a project because if the cost of the investment is going to be
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the long run, the savings will be greater than the increase in manufacturing costs. In order to figure out if this proposal makes financial sense, I calculated the Net Present Value, Internal Rate of Return, and the Payback Period for the years 2003 through 2009. So what is the Net Present Value? The NPV is today's value of the difference between cash inflows and outflows projected at future dates. When a firm makes profit it can either reinvest the cash or return it to the investor. If cash is
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