Time value of money, NPV, FV, annuity payments
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In a Word document, upload your answers to the following questions below. Very importantly - show all your work. If your final answer is wrong, you can still receive partial credit if you show all of your steps and demonstrate a good understanding of the time value of money.
1. In two to three paragraphs, explain why the concept of present value is so important for corporate finance and is often the very first topic taught in any finance class.
2. Calculate the future value of the following:
a. $500 if invested for five years at a 5% interest rate
b. $700 if invested for three years at a 2% interest rate
c. $1200 if invested for seven years at an 11% interest rate
d. $400 if invested for ten years with a 0% interest rate
3. Calculate the present value of the following:
a. $2400 to be received three years from now with a 4% discount rate
b. $900 to be received five years from now with a 10% interest rate
c. $1150 to received two years from now with a 24% interest rate
d. $45,000 to be received eight years from now with a 7% interest rate.
4. Suppose you are to receive a stream of annual payments (also called an "annuity") of $7000 every year for three years starting this year. The discount rate is 6%. What is the present value of these three payments?
5. Suppose you are to receive a payment of $4000 every year for three years. You are depositing these payments in a bank account that pays 3% interest. Given these three payments and this interest rate, how much will be in your bank account in three years?
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Solution Summary
Response provides steps to compute the time value of money, NPV, FV, annuity payments
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1. In two to three paragraphs, explain why the concept of present value is so important for corporate finance and is often the very first topic taught in any finance class.
Present value is an important concept of the financial management. This is concept derived from the time value of money. The basic idea of time value of money is that a dollar today is worth more than a dollar tomorrow. (finance professor, 2009)
The investor has time preference of money because he can reinvest the funds, which are received early and can earn additional money Present value, is the future value being discounted by the rate of interest. This is because of reasons discussed before.
This concept is important because the major financial objective of the organization ...
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