Case- The Time Value of Money and Financial Statement Analysis

Solving Present Value and Future Value Problems

You are the CFO (Chief Financial Officer) of ABC Golf Equipment Corporation, a small company that sells golf equipment. Mr. Hillbrandt, the new CEO (Chief Executive Officer) has a marketing background and is trying to learn more about the financial side of running a business. He wants your help and asks for an introduction to the concept of time value of money.

The value of a typical corporate bond is the present value of an annuity plus the present value of a lump sum. Thus, if an individual does not understand how to calculate the present value of a lump sum or the present value of an annuity, it is difficult to determine the value of a typical corporate bond. Thus, in this case assignment, you will work through a variety of time value of money problems to illustrate the idea to the CEO.

The following websites include a number of formulae and financial calculators, including Present Value, Future Value, and Annuity:

Financial calculators. (2015). Calculator Soup. Retrieved from http://www.calculatorsoup.com/calculators/financial/

Carther, S. (2015). Calculating the present and future value of annuities. Investopedia. Retrieved from http://www.investopedia.com/articles/03/101503.asp

Required:

Compute and show your work for the following scenarios:

Calculate the present value of the following lump sums:

• $100,000 to be received five years from now with a 5% annual interest rate
• $200,000 to be received 10 years from now with a 10% annual interest rate

Calculate the future value of the following lump sums:

• $100,000 if invested for five years at a 5% annual interest rate
• $200,000 if invested for 10 years at a 10% annual interest rate

Calculate the present value of these ordinary annuities:

• $100,000 to be received each year for five years with a 5% annual interest rate
• $200,000 to be received each year for 10 years with a 10% annual interest rate

Calculate the future value of these ordinary annuities:

• $100,000 if invested each year for five years at a 5% annual interest rate
• $200,000 if invested each year for 10 years at a 10% annual interest rate

Calculate the present value of these perpetuities:

• $100,000 to be received each year forever with a 5% annual interest rate
• $200,000 to be received each year forever with a 10% annual interest rate

Computations (use Excel).

1. Show the computations as required above.

2. Summarize the results in an easy to read table at the top of the spreadsheet or on a clearly labeled separate tab.

Memo (use Word).

Interpret the results from the computations and explain how the information is useful. Write a four or five paragraph memo to the CEO. Start with an introduction and end with a conclusion or recommendation. Each of the four or five paragraphs should have a heading.

Short Essay (use Word).

Do research and write a short essay to comment on the use of bonds by public corporations. The emphasis of the essay could be either

• A discussion of different types of bonds; or
• The use of bonds in different industries.

Start with an introduction and end with a summary or conclusion. Use headings. Don't forget to reference your sources. Maximum length of two pages.