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Fin 501 Case 1 Memo & Essay

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ABC GOLF EQUIPMENT CORPORATION
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 able to allow the interest rate to work for us, and the higher the rate is, the greater future value we have. You will see the lump sum future value in “required calculation #2”.
Present and Future Values of Annuities
An annuity is a fixed sum of money paid to someone each year, for a specified period of time. Annuities are also used as a form of

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