Cash Flows - Present and Future Values
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1. How would you use the present and future value techniques in preparing a financial plan for retirement? How would required rates of return affect your decision? Explain your reasoning.
2. What is a loan amortization schedule? What type of loan and for how many years would you try to obtain one, if you were buying a house today? Explain your reasoning. What factors would impact your choice between two loans?
3. What are the three key inputs to the valuation model? How would you determine the valuation of an asset, whether it is a company, a home or a car? How would the intrinsic value differ from the market value?
4. Describe the free cash flow valuation model and explain how it differs from the dividend valuation models. What is the appeal of this model? Give an example of how you would use this model.
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Solution Summary
The solution determines the cash flows including the present and future values.
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1. How would you use the present and future value techniques in preparing a financial plan for retirement? How would required rates of return affect your decision? Explain your reasoning.
In finance, present value and future value are important concepts in establishing the relationship between future and present cash flows. Present value is the value of a cash flow which will be received in the future, when discounted into the present period. Future value, on the other hand, is the future worth of a present cash flow, after it has been discounted into the future.
The discounting process recognized that cash does not always have the same value of periods. Thus, discounting recognizes that interest must be paid for any cash taken.
Time value of money concepts like present value and future value are necessary in retirement plans. The objective of retirement analysis is to ascertain how much must be set aside at the present period in order that a fixed amount can be reaped in the future. In other words, future values are dependent on present values.
Future value = Present value * (1 + Interest rate) Year
From the above equation, you will observe that a linking factor is the interest rate. As interest rates increase so would the future value of any retirement. Similarly, if the interest rates decrease, so would the future values.
2. What is a loan amortization ...
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- B. Sc., University of Nigeria
- M. Sc., London South Bank University
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