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Time Value of Money Returns

1. Why do we say money has time value?
2. Why is it important for business managers to be familiar with time value of money concepts?
3. Define Present Value.
4. Define Future Value.
5. What are present value and future value interest factors? (as in PVIF and FVIF)
6. (Calculating future value) You buy a 6 year, 8% CD for $1,000. Interest is compounded annually. How much is it worth at maturity?
7. (Calculating present value) What's the present value of $1,000 to be received in 8 years? (Your required rate of return is 7% a year.)
8. (Calculating the rate of return) A friend promises to pay you $600 two years from now if you loan him $500 today. What interest rate is your friend offering you?
9. (Calculating the future value of an annuity) If you invest $100 a year for 20 years at 7% annual interest, how much will you have at the end of the 20th year?
10. (Calculating the present value of an annuity) How much would you be willing to pay today for an investment that pays $800 a year at the end of the next 6 years? (Your required rate of return is 5% a year.)

Solution Preview

1. Money has time value because a dollar today is not the same as a dollar tomorrow due to inflation. Therefore, it's always wiser for us to invest our dollar today to accrue interest on that dollar tomorrow.

2. Business managers are to be familiar with the time value of money concepts because we live a capitalistic society in which bills, salaries, and taxes need to be paid. In addtion, money needs to be invested in ways to ...

Solution Summary

The importance for business managers to be familiar with time value of money concepts is examined.

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