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Fin 200 Week 8 Check Point

In: Business and Management

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Time Value of Money

1. The present value of money, also referred to as discounted value, is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discounted rate, and the higher the discounted rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations. (Chapter 9 Page 257 Para 5) 2. The present value of annuity is the value of a stream of expected or promised future payments that have been discounted to a single equivalent value today. (Chapter 9 Page 260 Para 2) 3. Future value of money is the amount that a specified amount of money in the present will be worth at a future date, given a certain interest rate. (Chapter 9 Page 268 Para 1-3) 4. Future value of annuity is the value of a group of payments at a specified date in the future. (Chapter 9 page 268) 5. Provide examples for how each might be used: • Present value of money is the basis that receiving $1,000 now is worth more than $1,000 five years from now, because if you got the money now, you could invest it and receive an additional return over the five years. The formula for present value is: PV = FV [1 / (1+I)^n]. (Chapter 9 Page 258 Para 1) • Present value of annuity is extremely useful for comparing two separate cash flows that differ in some ways. Present value of annuity can also be thought of as the amount you must invest today at a specific interest rate so that when you withdraw an equal amount each period, the original principal and all accumulated interest will be completely exhausted at the end of the annuity. The formula for present value of annuity is: [pic]. (Chapter 9 Page 261 Para 1) • Future value of money is used to

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