Free Essay

Present Value Tutorial

In: Business and Management

Submitted By sirromanjones
Words 844
Pages 4
First, as discussed above, you need to know the amount and timing of payments to be made or expected to be received. In the first example, you expect $11,000 five years from now. In the second, you expect $200 in year 1, $200 in year 2, $200 in year 3, $200 in year 4, and $10,200 in year 5.

Once you’ve determined this, you have a couple of vital pieces of information:

You know whether you’re looking at a lump sum, an annuity (a stream of payments), or both. In the first example, it’s a lump sum. In the second, it’s an annuity of $200, and a lump sum of $10,000 (because the $200 in year 5 belongs to the annuity of $200, not to the lump sum of the principal).

This tells you what present value tables to use. You use the Present Value of $1 (Present Value of a Single Sum) table to value the lump sums. You use the Present Value of an Ordinary Annuity to value streams of payments. So in the second example, you’d use the PV of $1 table to get the present value of the $10,000 lump sum, and you’d use the PV of an Ordinary Annuity table to get the present value of the five $200 payments.

Before you can use the tables, though, there is one more step. You need to find n, and i. * n is the number of interest compounding periods involved. * If you are looking at the PV of a lump sum, n = the number of years before the sum will be paid. In the first example, n = 5. * It is more complicated if you are looking at an annuity. If the annuity stream (interest, for purposes of Chapter 14) is paid annually, n = number of years during which the sum will be paid. In the second example, if we assume annual interest payments, n = 5. BUT if your interest is paid some other way that annually – semi-annually, or quarterly, for example, you need to determine how many interest payments there will be. For the second example, instead of assuming annual payments, assume that interest gets paid semi-annually. If it’s a five year term, how many interest payments are we talking about then? 5 years x 2 payments per year = 10. So n = 10 in this situation. Likewise, if we assume quarterly payments, then 5 years x 4 payments per year = 20, and n = 20. * i is the effective interest rate. As with n we need to keep the number of payments per year in mind. Let’s assume a 10% rate. * If interest is paid annually, i = 10%. * If interest is paid semi-annually, i is 10% ÷ 2 = 5%. Every interest payment is 5% of the principal. You’re still getting 10% every year, but because you get paid twice, each payment is only half of what it would be if you got paid annually. * If the interest is paid quarterly, i = 10% ÷ 4 = 2.5%. * You need to determine the amount of each interest payment, too. * If it’s paid annually, and the rate is 10%, then each payment is $10,000 x 10% = $1,000. * If it’s paid semiannually, the rate of each payment is 5%, so the amount of the payment would be $10,000 x 5% = $500. * If it’s paid quarterly, the rate of each payment is 2.5%, so the amount of the payment would be $10,000 x 2.5% = $250. You can see that no matter how we cut it up, you’re still getting $1,000 per year, and the annual interest rate is still 10%.

Now that you know 1. the amount of any lump sum to be paid or collected in the future, 2. the amount of each interest payment (which may not be the same as the total annual interest payment!), 3. n, the number of interest compounding periods, and 4. i, the effective interest rate
You are ready to use the tables.

For your lump sum 1. Look at the Present Value of $1 table. Locate the factor that corresponds to n (rows) and i (columns). 2. Multiply that factor by the amount of the lump sum. 3. This is the present value of that lump sum. 4. If you have a series of interest payments, go to the Annuity, below. Otherwise, you’re done – you have the present value of the debt or investment.

For the annuity 1. Look at the Present Value of an Ordinary Annuity table. Locate the factor that corresponds to n (rows) and i (columns). 2. Multiply that factor by the amount of the interest payment (as calculated above, where you took the number of payments per year into consideration). 3. This is the present value of that series of interest payments. 4. Add that to the present value of the lump sum, from step 3, above, to get the present value of the entire debt or investment.

Similar Documents

Free Essay

Johnnl

...Introduc)on to financial management WEEK 1 Chapter 1 & 2 1 Expectations •  A#end all classes with copies of slides. •  Read the text book. •  A#end all tutorials and par)cipate. •  Complete the weekly quizzes and assignments. •  If you are struggling •  A#end consulta@on •  A#end PAL. •  Don’t leave it to the last week. 2 The objective of managers •  Should be to maximise the wealth of the shareholders •  A company also has other stakeholders that rely on it, for example: •  Managers: salaries, bonuses •  Employees: wages •  Creditors: interest & principle •  Suppliers: pay for goods/services •  Government: tax The role of the =inancial manager •  A firm generates cash flows by selling goods and services produced by its produc)ve assets and human capital •  When the cash flows generated from the produc@ve asset exceed the cash ouQlows (such as opera@ng cash flows) the remaining cash is called residual cash flows •  The company can choose to pay any profit to the owners as a cash dividend, or reinvest the cash in the business Cash =low diagram 5 The role of the =inancial manager It is all about cash flows: •  A company is unprofitable when it fails to generate sufficient cash inflows to pay opera@ng expenses, creditors and taxes. •  Firms that are unprofitable over @me will be forced into bankruptcy by their creditors. •  In bankruptcy, the company will either be reorganised, or the company’s assets will be liquidated. ...

Words: 2563 - Pages: 11

Premium Essay

Beat the Bullshit

...David is the founder of the now world-famous website and Youtube channel MBAbullshit.com with 1 MILLION+ FREE tutorial video views worldwide on YouTube (as of May 2012) Beat The Bullshit This book aims to explain some the most "seemingly complicated" topics in these fields in a conceptual way, rather than explaining the common "how to calculate" way, which is much, much better explained and more easily understood in my step-by-step easy and quick tutorial videos (basic videos are FREE!) on my website www.MBAbullshit.com. *Please see Disclaimer, Terms and Conditions on the last page. Hey wadup! What do they TRY to teach you in business school but HARDLY explain well? Whenever we read our textbooks in business school, we often get very confused about all these different concepts which look scary and complicated. More often than not, these scary concepts are found in the fields of Accounting, Financial Management, and Quantitative Analysis. Here you will learn to lose that fear, and realize that the “scaryness” was only in the way it was presented to you in the past; and that there’s really nothing to be afraid of! David 2 Beat The Bullshit After you understand these concepts, you'll be surprised at how much easier the calculation part will become, whether you learn it from your professor or from my many FREE and easy tutorial videos on MBAbullshit.com. 3 Beat The Bullshit My Promise I promise that this book will explain more about concepts,...

Words: 4609 - Pages: 19

Premium Essay

Whirlpool

...누르시면 18이라는 답이 나오게 되고, AOS Method로 Setting을 하신다면 12라는 답이 나오게 됩니다. 그러므로 일반적인 계산 방식에 따라 Chn Method로 Setting하시는 것이 좋습니다. 8. 여기까지 실행하신 후 Button을 누르십시오. 9. 화면에 0.000 이라는 표시가 나타납니다. 를 누르시면 화면에 P/Y = 12.000 이 나타납니다. 이것이 의미하는 바는 1년에 Payment가 12번 이뤄진다는 뜻입니다.그러나 일반적으로 1년에 한 번씩 Payment가 이뤄진다는 가정하에 문제가 출제되므로 를 누르시면 P/Y = 1.000으로 Setting이 됩니다. 이것으로 Finance용으로 사용할 수 있는 계산기 Setting이 끝나게 됩니다. 그럼 이제까지의 과정을 그림으로 표시해 보도록 하겠습니다. → → → → → → → → → → → → → → → → → → Ⅱ. Time Value of Money 계산법 Ⅱ-1 Time Value of Money의 Work Sheet Time Value of Money를 계산할 때는 계산기의 셋째줄에 있는 Key와 Key 만을 사용하면 됩니다....

Words: 1951 - Pages: 8

Free Essay

Smithfield Case - Small and Medium Farmers Solution

...gain bargain power. They have to create their own value, like they have a dense network, or speaking about structure, it could be a reciprocal network. The ideia behind this concept is that the farmers (small and medium) could create a condominium, just like here in Brazil in sugar cane, making a synergistic relationship. They can cooperate buying a high volume of inputs for the creation, in other words, together they also possess greater bargaining with suppliers as well, obtaining economies of scale. Furthermore, to maintain the combined output at a level high enough to bargain as the major producers, the relation between them should be strong and long-term as well as the negotiated contract with Smithfield. Still, the producers, because of the laws on anticorporate in Iowa, they must monitor each other to keep production in line with them. In short, working together in a manner dependent on each other is somehow important in this case, since the condo (which is different from a cooperative) professional, who can negotiate on behalf of the products so that they can 'benefits "like the big producers in relation to the input and the Smithfield area, so there is a relationship dense (strong), with long-term contracts with Smithfield, which symbolize the evolution of a weak to a reciprocal relationship, while synergistic. 1) To draw the net chain NetChain Sources of value – SCA (Sequential interdependence) 1)......

Words: 334 - Pages: 2

Free Essay

Present Value Tables

...Brealey−Myers−Allen: Principles of Corporate Finance, Eighth Edition Back Matter Appendix A: Present Value Tables © The McGraw−Hill Companies, 2005 APPENDIX A PRESENT VALUE TABLES A P P E N D I X TA B L E 1 Discount factors: Present value of $1 to be received after t years 1/(1 r)t. Interest Rate per Year Number of Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% .990 .980 .971 .961 .951 .942 .933 .923 .914 .905 .896 .887 .879 .870 .861 .853 .844 .836 .828 .820 2% .980 .961 .942 .924 .906 .888 .871 .853 .837 .820 .804 .788 .773 .758 .743 .728 .714 .700 .686 .673 3% .971 .943 .915 .888 .863 .837 .813 .789 .766 .744 .722 .701 .681 .661 .642 .623 .605 .587 .570 .554 4% .962 .925 .889 .855 .822 .790 .760 .731 .703 .676 .650 .625 .601 .577 .555 .534 .513 .494 .475 .456 5% .952 .907 .864 .823 .784 .746 .711 .677 .645 .614 .585 .557 .530 .505 .481 .458 .436 .416 .396 .377 6% .943 .890 .840 .792 .747 .705 .665 .627 .592 .558 .527 .497 .469 .442 .417 .394 .371 .350 .331 .312 7% .935 .873 .816 .763 .713 .666 .623 .582 .544 .508 .475 .444 .415 .388 .362 .339 .317 .296 .277 .258 8% .926 .857 .794 .735 .681 .630 .583 .540 .500 .463 .429 .397 .368 .340 .315 .292 .270 .250 .232 .215 9% .917 .842 .772 .708 .650 .596 .547 .502 .460 .422 .388 .356 .326 .299 .275 .252 .231 .212 .194 .178 10% .909 .826 .751 .683 .621 .564 .513 .467 .424 .386 .350 .319 .290 .263 .239 .218 .198 .180 .164 .149 11% .901 .812 .731 .659 .593 .535 .482 .434 .391 .352 .317 .286 .258 .232 .209 .188 .170......

Words: 6223 - Pages: 25

Premium Essay

Management

...Chapter 4 Time Value of Money Solutions to Problems P4-1. LG 1: Using a Time Line Basic (a), (b), and (c) Compounding Future Value –$25,000 $3,000 $6,000 $6,000 $10,000 $8,000 $7,000 |—————|—————|——————|——————|—————|——————|—> 0 1 2 3 4 5 6 End of Year Present Value Discounting (d) Financial managers rely more on present than future value because they typically make decisions before the start of a project, at time zero, as does the present value calculation. 74 P4-2. Part 2 Important Financial Concepts LG 2: Future Value Calculation: FVn = PV × (1 + i)n Basic Case A B C D P4-3. FVIF12%,2 periods FVIF6%,3 periods FVIF9%,2 periods FVIF3%,4 periods = (1 + 0.12)2 = 1.254 = (1 + 0.06)3 = 1.191 = (1 + 0.09)2 = 1.188 = (1 + 0.03)4 = 1.126 LG 2: Future Value Tables: FVn = PV × (1 + i)n Basic Case A (a) 2 = 1 × (1 + 0.07)n 2/1 = (1.07)n 2 = FVIF7%,n 10 years< n < 11 years Nearest to 10 years Case B (a) 2 = 1 × (1 + 0.40)n 2 = FVIF40%,n 2 years < n < 3 years Nearest to 2 years Case C (a) 2 = 1 × (1 + 0.20)n 2 = FVIF20%,n 3 years < n < 4 years Nearest to 4 years Case D (a) 2 = 1 × (1 + 0.10)n 2 = FVIF10%,n 7 years < n < 8 years Nearest to 7 years P4-4. (b) 4 = 1 × (1 + 0.07)n 4/1 = (1.07)n 4 = FVIF7%,n 20 years < n < 21 years Nearest to 20 years (b) 4 = (1 + 0.40)n 4 = FVIF40%,n 4 years < n < 5 years Nearest to 4 years (b) 4 = (1 + 0.20)n 4 = FVIF20%,n 7 years < n <......

Words: 2773 - Pages: 12

Premium Essay

Walmart

...Net Present Value of Mercury Athletic Enterprise The results of my financial analysis based on the Free Cash Flow Method considering the base case of financial projections and assumptions for Mercury Athletic Footwear collated and developed by John Liedtke indicate that that the project to acquire Mercury Althletic has a positive net present value at $243,025 (in thousands) [ given by PV(FCF)=86,681+ PV (Terminal Value) =156,343] which is also greater than the recommended acquisition price of $186,216 (in thousands),therefore Active Gear Inc. should proceed with the acquisition of Mercury’s operation. Free Cash Flow The free cash flow from Mercury’s business operations was determined using the base case for the consolidated operating income, expenses, tax rate and depreciation to determine the net operating profits after tax (NOPAT) for the years 2007-2011. Free cash flow was then calculated using the formula (FCF= NOPAT + Depreciation-∆ Net Working Capital -∆Fixed Assets) which was evaluated at $21,240, $26,727, $ 22,097, $25,473 and $29,545 for the years 2007, 2008, 2009, 2010 and 2011 respectively.  The Cost of Debt and the Cost of Equity The next step was to determine the coast of debt, using the assumptions made by Mr. Liedtke which outlines a tax rate of 40%, the cost of debt of 6% for a leverage of 20% debt. The after-tax cost of debt (RD) was determined to be 3.6% [using RD =(R*(1-Tax Rate), where RD =after rate cost of debt, R= cost of debt] The cost equity......

Words: 336 - Pages: 2

Premium Essay

Annual Cost

...of milk, that would et 350lbs/cow/year or slightly more than 1 lb/cow/day in milk. Furthermore, annual costs allows comparison or joint consideration of items having differing lengths of life. CALCULATION CONCEPT The annual cost includes charges for depreciation (purchase price minus salvage value), interest on the money invested, repairs for normal use, property taxes, and insurance. Repairs, property taxes, and insurance are usually rough estimates by percentage of price, with increases in repairs assumed to offset decreases in the other two. Interest is often loosely accounted for multiplying an average value of the item by an interest rate (discount, opportunity, MARR). This is crude and can be improved by using time value of money to convert price and salvage to an annual cost, which includes automatically both depreciation and interest. INFORMATION TO BE I NCLUDED 1. Purchase Price – to be annualized 2. Salvage Value – also to be annualized. Can be figured several ways, guessed, or ignored entirely if years of life are extended long enough. This does not require that one plans to actually sell the item in the end. Fortunately, salvage, when converted from future value to annual value, becomes quite small and often insignificant. 3. Repairs – estimated as a percentage of purchase price, therefore already annualized. This in reality a variable cost,...

Words: 902 - Pages: 4

Premium Essay

Ops 571 Ind Assignment

...OPS 571, Week 5 , Individual Assignment ,Original work. APA formatted with references. Total of 450 words. Only used once. For customized tutorial service or if you have any questions, please contact me at tutoruop@gmail.com. Please purchase to read the full essay. Thank you Project Management Recommendation Review the Project Management email. Write an email response in which you address the following points: • Determine which project might be implemented and why (e.g. feasibility study, breakeven analysis, etc). • Describe the five phases of a project • Describe the key deliverables associated with the selected project(s). Click the Assignment Files tab to submit your assignment. Dear Mr. Gritsch, My team has reviewed the contents and characteristics of each project candidate (Juniper, Palomino, and Stargazer). Before I present the recommended project and reasons for selecting it, I shall describe the five phases of the project below: 1. Project conception and initiation – This stage involves the examination of the project aspects to determine the feasibility and benefit of conducting the project. 2. Project definition and planning – This stage involves the development of a project plan, which outlines the work to be performed, schedules, and required resources. 3. Project execution – This stage involves the distribution of teams and responsibilities and plan implementation. 4. Project performance and control – This stage involves the......

Words: 542 - Pages: 3

Premium Essay

Corporate Finance Chapter 4 Solutions

...Solutions to Chapter 4 The Time Value of Money 1. a. b. c. d. $100/(1.08)10 = $46.32 $100/(1.08)20 = $21.45 $100/(1.04)10 = $67.56 $100/(1.04)20 = $45.64 $100 × (1.08)10 = $215.89 $100 × (1.08)20 = $466.10 $100 × (1.04)10 = $148.02 $100 × (1.04)20 = $219.11 2. a. b. c. d. 3. $100 × (1.04)113 = $8,409.45 $100 × (1.08)113 = $598,252.29 4. With simple interest, you earn 4% of $1,000 or $40 each year. There is no interest on interest. After 10 years, you earn total interest of $400, and your account accumulates to $1,400. With compound interest, your account grows to: $1,000 × (1.04)10 = $1480.24 Therefore $80.24 is interest on interest. PV = $700/(1.05)5 = $548.47 5. 4-1 6. Present Value a. $400 Years 11 Future Value $684 Interest Rate ⎡ 684 ⎤ ⎢ 400 ⎥ ⎣ ⎦ ⎡ 249 ⎤ ⎢ 183 ⎥ ⎦ ⎣ (1 / 11) − 1 = 5.00% (1 / 4 ) b. $183 4 $249 − 1 = 8.00% (1 / 7 ) c. $300 7 $300 ⎡ 300 ⎤ ⎢ 300 ⎥ ⎣ ⎦ − 1 = 0% To find the interest rate, we rearrange the basic future value equation as follows: ⎡ FV ⎤ FV = PV × (1 + r) ⇒ r = ⎢ ⎣ PV ⎥ ⎦ t (1 / t ) −1 7. You should compare the present values of the two annuities. a. ⎡ 1 ⎤ 1 − PV = $1,000 × ⎢ = $7,721.73 10 ⎥ ⎣ 0.05 0.05 × (1.05) ⎦ ⎡ 1 ⎤ 1 − PV = $800 × ⎢ = $8,303.73 15 ⎥ ⎣ 0.05 0.05 × (1.05) ⎦ b. ⎡ 1 ⎤ 1 − = $4,192.47 PV = $1,000 × ⎢ 10 ⎥ ⎣ 0.20 0.20 × (1.20) ⎦ ⎡ 1 ⎤ 1 − PV = $800 × ⎢ = $3,740.38 15 ⎥ ⎣ 0.20 0.20 × (1.20) ⎦ c. When the interest rate is low, as...

Words: 6215 - Pages: 25

Free Essay

Adadfade

...BUSINESS 111 FALL 2011 NON-BBA FINAL EXAM REVIEW GUIDE Final Exam Date: FRIDAY, DECEMBER 9TH, 2011 Exam Time for WLU Students: 7:00 p.m. – 9:30 p.m. Exam Time for UW Students: 7:30 p.m. – 10:00 p.m. Writing Locations posted at https://www.wlu.ca/~mibrahim/exams/FALL2011/BUSINESS.html Important Notice: If a student cannot write a business or economics final exam as scheduled, they must submit a "Petition for Exception to Academic Regulations" form to Ms Lee Leeman, Student and Petitions Coordinator, SBE1256. Supporting documentation will be required and verified.  This permits equitable treatment for all students taking SBE courses.  If appropriate circumstances are presented with appeals, students will be accommodated on either the SBE slip day or the next exam session. Exam Format: 20 Multiple Choice questions = 1 mark each 6 Short Answer questions, 2 to 6 marks each, choice in 1 question = 25 marks 7 Quantitative problems, 3 to 6.5 marks each, choice in 1 question = 35 marks 80 marks total TOPICS TO BE COVERED: (Items listed in red indicate quantitative problems) Economic Factors - four pillars of Canadian financial system – description, roles - Bank of Canada - description, tools for affecting money supply - bonds – characteristics (return, term, priority over stockholders), types, features, factors affecting price, calculating approximate yield to maturity, relationship between prevailing interest rates and bond prices, reading......

Words: 621 - Pages: 3

Premium Essay

استفسار عن كتاب.

...Instructor’s Manual Fundamentals of Financial Management twelfth edition James C. Van Horne John M. Wachowicz JR. ISBN 0 273 68514 7  Pearson Education Limited 2005 Lecturers adopting the main text are permitted to photocopy the book as required. © Pearson Education Limited 2005 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Previous editions published under the Prentice-Hall imprint Twelfth edition published under the Financial Times Prentice Hall imprint 2005 © 2001, 1998 by Prentice-Hall, Inc. © Pearson Education Limited 2005 The rights of James C. Van Horne and John M. Wachowicz JR. to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patent Act 1988. ISBN: 0 273 68514 7 All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court......

Words: 80242 - Pages: 321

Premium Essay

Forst Hill Paper Company Case

...Q7-1) The YTM is the interest rate the market requires for a bond. The coupon rate is the annual coupon divided by the face value of the bond. The coupon rate will remain the same. If the bond is issued with a 8% coupon rate but the YTM is 10% the bond will still have an 8% coupon rate it would just be sold at a discount because the price of the $1,000 bond has now decreased to match the 10% YTM. Q7-4) Original Bond: Present Value: $1,000/1.09(9)=$460.43 Annuity Present Value: $90 x (1-1/1.09(9))/.09 =$90 x (1-1/2.171893279)/.09 =$90x5.995246893 =$539.57 =$460.43 + $539.57 = $1,000 Bond currently sells for $934 so we will try using a 10% YTM. $1,000/1.10(9) = $424.10 = $90 x (1-1/1.10(9)/.10 =$90 x (1-1/2.357947691)/.10 =$90 x 5.759023816 =$518.31 = $424.10 + $518.31 = $942.41 – so it is not 10% Trying 11% $1,000/1.11(9) = $390.92 =$90 x (1-1/1.11(9)/.11 =$90 x (1-1/2.558036924)/.11 =$90 x 5.537047532 =$498.33 =$390.92 + $498.33 =$889.25 so it is not 11%. Trying 10.5% $1,000/1.105(9) = $407.14 =$90 x (1-1/1.105(9)/.105 =$90 x 5.646323879 =$508.17 =$407.14 + $508.17 =$915.31 Trying 10.25% $1,000/1.1025(9) = $415.52 =$90 x (1-1/1.1025(9)/.1025 =$90 x 5.702237514 =$513.20 =415.52 + $513.20 = $928.72 Trying 10.2% $1,000/1.102(9) = $417.22 =$90 x (1-1/1.102(9)/.102 =$90 X 5.713524415 =$514.22 =$417.22 +......

Words: 456 - Pages: 2

Premium Essay

Financial Management Fundamentals

...Instructor’s Manual Fundamentals of Financial Management twelfth edition James C. Van Horne John M. Wachowicz JR. ISBN 0 273 68514 7  Pearson Education Limited 2005 Lecturers adopting the main text are permitted to photocopy the book as required. © Pearson Education Limited 2005 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Previous editions published under the Prentice-Hall imprint Twelfth edition published under the Financial Times Prentice Hall imprint 2005 © 2001, 1998 by Prentice-Hall, Inc. © Pearson Education Limited 2005 The rights of James C. Van Horne and John M. Wachowicz JR. to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patent Act 1988. ISBN: 0 273 68514 7 All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court......

Words: 80242 - Pages: 321

Premium Essay

Ch O4

...Chapter 4 Time Value of Money Solutions to Problems P4-1. LG 1: Using a Time Line Basic (a), (b), and (c) Compounding Future Value –$25,000 $3,000 $6,000 $6,000 $10,000 $8,000 $7,000 |—————|—————|——————|——————|—————|——————|—> 0 1 2 3 4 5 6 End of Year Present Value Discounting (d) Financial managers rely more on present than future value because they typically make decisions before the start of a project, at time zero, as does the present value calculation. 74 Part 2 Important Financial Concepts P4-2. LG 2: Future Value Calculation: FVn = PV × (1 + i)n Basic Case A B C D FVIF12%,2 periods FVIF6%,3 periods FVIF9%,2 periods FVIF3%,4 periods = (1 + 0.12)2 = 1.254 = (1 + 0.06)3 = 1.191 = (1 + 0.09)2 = 1.188 = (1 + 0.03)4 = 1.126 P4-3. LG 2: Future Value Tables: FVn = PV × (1 + i)n Basic Case A (a) 2 = 1 × (1 + 0.07)n 2/1 = (1.07)n 2 = FVIF7%,n 10 years< n < 11 years Nearest to 10 years Case B (a) 2 = 1 × (1 + 0.40)n 2 = FVIF40%,n 2 years < n < 3 years Nearest to 2 years Case C (a) 2 = 1 × (1 + 0.20)n 2 = FVIF20%,n 3 years < n < 4 years Nearest to 4 years Case D (a) 2 = 1 × (1 + 0.10)n 2 = FVIF10%,n 7 years < n < 8 years Nearest to 7 years (b) 4 = 1 × (1 + 0.07)n 4/1 = (1.07)n 4 = FVIF7%,n 20 years < n < 21 years Nearest to 20 years (b) 4 = (1 + 0.40)n 4 = FVIF40%,n 4 years < n < 5 years Nearest to 4 years (b) 4 = (1 + 0.20)n 4 = FVIF20%,n 7 years < n < 8 years Nearest to 8 years (b) 4 = (1 + 0.10)n 4 = FVIF40%,n 14 years < n 0 1 2 3 4......

Words: 2748 - Pages: 11