Share
Explore BrainMass

The Time Value of Money

The time value of money is one of the underlying concepts in finance.  It is a concept that is relied on to make our markets work efficiently. 

In Ancient Greece, a theory of ethics in finance known as just price, advanced by Thoman Aquinas, was an argument against charging any rate of interest on loans. The term referred to making an unjust profit from a loan was known as usary. 

Today, we view the use of money as a valuable service, and recognize that interests payments in return for this service are a key factor in regulating today's markets. 

The general concept of time value of money relies on the fact that you would rather have money to use today then in the future. However, you would put off having money today if you were to get something in return, or earn interest on it. As a result, we say "the value of a dollar today is worth more than the value of a dollar in the future."

Time value of money concepts, such as present value and future value are used to determine how much money you would rather have today, or in the future, in markets where one can freely lend and borrow.  

Future Value:

Future value measures the value of a present amount at a future date. Because a dollar that you have today can earn interest, the future value will be worth more than one dollar. In fact, it will be worth one dollar plus the amount of interest it could earn. 

The value of a present amount at a future date found by compounding, that is, applying a compound interest rate over a specified period of time.

For example, if you had a dollar today and invested it at 5% interest, you would have the principle ($1) and the interest ($1 x 0.05 = $0.05) one year from now, for a total of $1.05. In two years you would have not only that initial $1, but you would also have interest from the first year, and 5% interest on $1.05 the second year ($1.05 x 0.05 = $0.525). Therefore, after two years you would have $1.1025 ($1 + 0.05 + 0.0525). The formula for future value for multiple years, or periods, can be simplified as follows: 

Where: FV = Future value at the end of period n
            PV = initial principle, or present value
               r = interest rate, rate of return or discount rate
              n = the number of periods 

Present Value:

The present value is the value that an amount to be received in the future has in today's terms. To have $1 in the future, you would invest less than one dollar today and collect interest on it. The amount that you would need to invest today is called the present value, and the present value + the interest that could be earned equals the future value. As a result, the present value will always be less than the future value. 

For example, companies often issue bonds in order to raise capital. If a bond is issued that is worth $1,000 one year from now, how much would a lender be willing to lend, or pay for that bond today? The present value formula can be found by rearranging the future value formula to get present value on the left hand side. 

 

NPV: Keep 3/4/5/6 years, equivalent annuity, MACRS real property

1. You are put in charge of replacing the fleet of sales and executive automobiles for your company. Three types of cars have been identified. The first type would cost less upfront, have higher maintenance cost, and lower salvage values after shorter lives. The second type would cost a little more upfront, have slightly lower m

Ratio analysis: Evaluate the strengths and weaknesses

A) compare and evaluate the strengths and weaknesses of ABC and XYZ companies. B) calculate the price-to-earnings ratios for both firms. Explain what a P/E ratio tell an analyst. What could be the cause of the difference between ABC'S and XYZ'S P/E ratios?

Rare Metals: Ratios under LIFO or FIFO, explain diffs, purchases

RareMetals. Inc. sells a rare metal found only in underdeveloped countries overseas. As a result of unstable governments in these countries and the rarity of the metal, the price fluctuates significantly. Financial information is given assuming the use of the first-in, first-out (FIFO) method of inventory valuation and also the

Mortgage Interest Rate versus APR

Time value of money has many applications in the business world as well as in our own financial decisions. Task: Read a recent article (online, newspaper, magazine) that gives advice to individuals about interest rates as they relate to one of these topics: retirement planning; bank accounts; home mortgages; or automobile loa

Cash Flow Statement

indicate which of the following current assets and current liabilities and operating accounts(O) and thus included in the adjustment of net income to cash flow from operating activities and which are cash (C), investing (I), or financing(F) accounts. a. accounts payable b. accounts receivable c. notes payable (to bank) d. ma

What tools best solve time value of money problems?

What tools (excel, financial calculator, tables, websites tools, formula's, etc.) work best for you to solve the time value of money problems and exercises. Why do they work best? What aspects of each of the tools do you like and don't like. If you find some good tools on line, please share the website if applicable.

Abbott Laboratories

Write a brief description of Abott Laboratories including the sector, products, key executives (CEO, CFO, COO) information - name, education, years of experience. You may use yahoo finance, morningstar or any financial websites. One page.

Answers to Various Financial Questions

Jenny just married Tim. Jenny remains to work as a cashier for a restaurant, and her monthly income has averaged $2,840 a month over the past year. Tim is working as a computer programmer and earns $3,000 a month. Their shared monthly income let them to live comfortably. Yet they have been unable to save any money for urgent sit

Personal Financial Planning..

1. For each of the following, select items in the list (may be more than one) that are tax deductions. a. Charitable donations b. Moving expenses c. Child care cost d. State personal income taxes paid 2. Calculate the Total Liquid Assets Money market account $ 4240 Medical Bills $ 740 Mortgage $ 104560 Checking account

Long-term Financial Planning

During in college, Jenny worked part-time and was never concerned about long-term financial planning. Rather than creating a budget, she used her checkbook and savings account (which usually had a very low balance) to handle her financial needs. As soon as she's finishing college, she started her career as a teller in the bank.

How interest rate affects the mortgage value

1. Consider a home mortgage where you borrow $200,000 with a 30-year fixed rate loan. Suppose the mortgage interest rate is 0.708333% per month. a. What is your monthly mortgage payment? b. Solve for the principal and interest components of the first 12 mortgage payments. What is your outstanding mortgage balance at the end o

Management Study Questions

1. What are the two basic sources of funds for all businesses? Question 1 options: Debt Equity Both debt and equity None of the above Question 2 (1 point) True or False Working capital management is the management of current assets, such as inventory, and current liabilities, such as money owed to suppliers

CVP Analysis, Time Value of Money - Retirement Fund

1. Tanya's balance on a student loans is $24,000 today (first day of month). The rate on the loan is 6% NAR with monthly compounding. a. Tanya would like to payoff the loan in three years. The first payment would be at the end of the present month. What equal end-of-month payments would she have to make to do this? b.

Car Loan Time Value of Money

DISCOUNT RATE IS: 10% 1) Buy car for $35,000. If bank will lend $30,000 (10% discount rate), what will annual payments be? Make 1st payment at end of year and make 5th and final payment at end of 5th year. SHOW IN EXCEL WITH "PAYMENT" FUNCTION 2) If payments were monthly, instead of annual, what would monthly car paym

Case Analysis - Panera Bread

Using the attached information, can you please help me with the following? Thank you!! VII. Implementation A. Implementation (This is where you can be creative using the information you have already provided. You will need to make up the programs, people, and finances.) B. Programs (Be creative! What programs would you wa

Analysis of Strategic Factors (SWOT)

Can you please help me with the following case study on Panera Bread? Supporting documents attached, if needed. Thank you. V. Analysis of Strategic Factors (SWOT) A. VRIO Analysis B. SWOT Analysis VI. Strategic Alternatives and Recommended Strategy A. Analysis of Strategic Alternatives ( you must have at least 2 alternat

Analysis of Panera Bread

Can you please help me with the following case study on Panera Bread? Supporting documents are attached. IV. Internal Environment: Strength and Weaknesses A. Corporate Structure B. Corporate Culture C. Corporate Resources 1. Marketing Analysis a. Price b. Product c. Place d. Promotion e. Key Marketing Strategies:

Panera Bread 2010 Ratio Analysis

Using the Panera Bread website, https://www.panerabread.com/en-us/company/investor-relations.html conduct a financial ratio analysis for the 2010 fiscal year using the following ratios: Current ratio, quick ratio, net profit margin, return on investment, return on equity, inventory turnover, days of inventory, asset turnover, f

Calculating the time value of money in Excel

Jack has the cash to buy a car but the salesperson argues it would be better for Jack to borrow the funds. The math salesperson gives is that you can earn more on the same $15,100 in an 8% CD than he'd pay out on a 14.2% car loan. By calculating that 48 months of interest on a 14.2% loan of $15,100 would be $4,779.20, while th

Present Value of Growing Annuity

Jane has a child and wishes to begin saving for college expenses. Child will enter college in 6 years. Assume child will spend 4 years in college, that the real (ie: inflation adjusted) annual cost of a college education will remain at $24,000, that the nominal interest rate is 4.55%, that the expected rate of inflation is 2.0%,

Financial Analysis of Under Armour

Can you please help me with the following financial analysis and the attached questions (see attachment)? Please help prepare a financial analysis for 2008 and 2009 for Under Armour - http://investor.underarmour.com/investors.cfm The financial analysis should include: Current ratio Quick ratio Net profit margin Retur

Intrinsic Value of a Stock and the Dividend Discount Model

Part I A company's common stock dividends are anticipated to grow at a constant 5.5% growth rate per year going forward. The company just paid an annual dividend (that is, D-zero) of $3 per share. What's the intrinsic value of the stock based on the following required rates of return? 6% 8% 10% 12% If the stock is curren

Time Value of Money in Real Estate: Southampton

Before there was Paris Hilton, there was Consuelo Vanderbilt Balsan - a Gilded Age heiress and socialite, re-nowned for her beauty and wealth. Now Ms. Balsan's onetime Hamptons home is slated to hit the market priced at $28 million with Tim Davis of the Corcoran Group. Located on Ox Pasture Road in Southampton, the shingle-st

Capital budgeting Practice True False Exam Questions

Net Present Value Practice True false questions 1. The three common discounted cash flow methods are net present value, internal rate of return, and payback. 2. The net present value (NPV) method calculates the return on investment from a project by discounting all expected future cash inflows and outflows back to the pre

Accounting: Balance Sheets, Income Statements and Cash Flows

Question 1: On 1 January 2012, Rose Tremayne opens a bank account in the name of her new trading business, Rose Tremayne Trading (RTT). She puts £112,000 of her own money into the business bank account. The following is a summary of transactions during 2012: (1) RTT takes out a short-term bank loan of £45,000 cash. (2) RT

Growing Annuity Payments: Amount of Your First Deposit

You want to accumulate $1 million by your retirement date, which is 25 years from now. You will make 25 deposits in your bank, with the first occurring today. The bank pays 8% interest, compounded annually. You expect to receive annual raises of 3%, which will offset inflation, and you will let the amount you deposit each year a

Rate of Return on a Stock

As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries's stock as market conditions change. Suppose rRF = 5%, rM = 12%, and bUTI = 1.4. (a) Under current conditions, what is rUTI, the required rate of return on UTI stock? (b) Now suppose rRF (1) increases to 6% or

Risks in Common Stocks

Select a portfolio of common stocks in five companies whose stock is traded on the New York Stock Exchange (NYSE). Base your selection of stocks on your own personal willingness to take risks. Look up the beta of each company. Using equal weights, compute the portfolio beta, showing your work. Discuss how the portfolio beta comp

Ethically behaving corporations

Do corporations have any responsibilities to society at large? Is stock price maximization good or bad for society? Discuss why firms should behave ethically. Define "ethically."( this is not an assignment) I need at least 300 words