As a financial manager you will often have to compare cash payments which occur at different dates. To make optimal decisions, you must understand the relationship between a dollar today [present value] and a dollar in the future [future value].
Future value is the amount to which an investment will grow after earning interest. Interest can be of two types: i) simple interest, and ii) compound interest.
1) How would you define time value of money in your own words? Please provide a brief definition of time value of money in your own words.
2) To what extent is it important for financial managers to understand the concept of time value of money? Why? Please explain your reasoning in two to three paragraphs.
If you do not know how to use calculator, please use the tables to answer question 3, 4, 5, and 6.
Brealey, R.A., Myers, S.C., & Allen, F. (2005). Principles of corporate finance, 8th Edition. The McGraw?Hill. Retrieved May, 2012, from
http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf
3) Calculate the future value of the followings:
a. $190,537.19 if invested for six years at a 8% interest rate
b. $231,891.22 if invested for four years at a 9% interest rate
c. $310,891.12 if invested for nine years at an 5% interest rate
d. $420,520.22 if invested for fifteen years with a 1% interest rate
Please use Table 2 [http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf]
4) Calculate the present value of the followings:
a. $552,126.17 to be received four years from now with a 3% interest rate
b. $125,003.21 to be received three years from now with an 8% interest rate
c. $621,567.35 to received nine years from now with a 14% interest rate
d. $93,000.05 to be received eleven years from now with a 2% interest rate
Please use Table 1 [http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf]
5) Suppose you are to receive a stream of annual payments (also called an "annuity") of $225,891.12 every year for five years starting at the end of this year. The interest rate is 7%. What is the present value of these five payments?
Please use Table 3 [http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf]
6) Suppose you are to receive a payment of $337,891.24 at the end of each year for seven years. You are depositing these payments in a bank account that pays 6% interest. Given these seven payments and this interest rate, how much will be in your bank account in seven years? If you do not know how to use calculator, please use Table [http://www.principlesofaccounting.com/ART/fv.pv.tables/fvofordinaryannuity.htm]
Please include the references used to obtain information/response