# Time Value of Money Definition and Several Calculations

I am having problems understanding the concepts and mathematical formulas of time value of money especially future value, present value and etc...

1. Provide a definition of time value of money.

2. To what extent is it important for financial managers to understand the concept of time value of money? Why? Please explain your reasoning in two or three paragraphs.

If you do not know how to use a calculator for these calculations, use the tables to answer questions 3, 4, 5, and 6.

Brealey, R. A., Myers, S. C., & Allen, F. (2005). Principles of corporate finance, 8th Edition. The McGrawâHill. Retrieved May 2012 from http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf

3. Calculate the future value of the following:

a. $150,537.19 if invested for seven years at a 5% interest rate

b. $237,891.22 if invested for eight years at a 3% interest rate

c. $320,891.12 if invested for 10 years at an 11% interest rate

d. $520,520.22 if invested for 13 years with a 13% interest rate

Use Table 2 [http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf]

4. Calculate the present value of the following:

a. $562,126.17 to be received seven years from now with a 5% interest rate

b. $225,003.21 to be received six years from now with a 6% interest rate

c. $321,567.35 to received five years from now with an 18% interest rate

d. $63,000.05 to be received twelve years from now with a 5% interest rate

Use Table 1 [http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf]

5. Suppose you are to receive a stream of annual payments (also called an "annuity") of $325,891.12 every year for 12 years starting at the end of this year. The interest rate is 6%. What is the present value of these 12 payments?

Use Table 3 [http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf]

6. Suppose you are to receive a payment of $437,891.24 at the end of each year for five years. You are depositing these payments in a bank account that pays 15% interest. Given these five payments and this interest rate, how much will be in your bank account in five years?

If you do not know how to use a calculator for these calculations, use the table found on http://www.principlesofaccounting.com/ART/fv.pv.tables/fvofordinaryannuity.htm

#### Solution Summary

Time value of money is a key concept of financial management. The concept is defined and the importance of the time value of money to financial managers. Also, there are several time value of money problems answered.