Question 1

The purchasing power of money changes over a certain period of time due to an opportunity of the present money to earn an interest or the inflation which may affect the prices of goods leading to high prices (Patnaik, 2009). This figuring of money due to the interest rate and inflation is referred to as the time value for money.

Most of the individuals would prefer to have the money at present than in the future. This is because they are not certain of the future. The future is prone to inflation and other financial crises that may affect the value of money. The dollar that is invested today has more value than a dollar that is invested in the future (Pond, 2008). This tells us that the money has time value.

Question 2

Importance of Time Value for Money to Managers

The managers of a certain company ought to have substantive knowledge on the concept of the time value of money. This is because they are usually involved and have a duty of making rational decisions that would not drive the company into loss (Patnaik, 2009). They need to have appropriate knowledge of the time value of money in order to maximize the wealth of the shareholders and also achieve the corporate goal of profit maximization.

When the projects are being appraised in a company, the time value of money is a very important tool that is used in the evaluation of these projects (Pond, 2008). The present value and the future value of money are calculated and used in the determination on which project will be chosen. The future value of money is discounted at the present value.

The time value of money also provides managers in a company with a platform over which company is able to factor in the contingencies that may arise in the course of business transaction. They are factored in by the discounting factor that captures inflation and other uncertainties in the business. The business will be in a good state, hence minimizing the risk of the uncertainties that may occur during the course of business (Sandel, 2012).

Question 3

Determination of the future value through calculation of the followings:

(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 ten years at an 11% interest rate;

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

(a)

P ($)

FVIF 5% 7yrs

FV

150,537.19

1.407

211,805.78

(b)

P ($)

FVIF3%  8yrs

FV

237,891.22

1.267

301,408.18

(c)

P ($)

FVIF11%  10yrs

FV

320,891.12

2.839

911,009.89

(d)

P ($)

FVIF13%  13yrs

FV

520,520.22

4.898

2,549,508.04

Question 4

Determination of the present value through calculation of the followings:

(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.

(a)

P ($)

PVIF5% 7yrs

PV

562,126.17

0.711

399,671.71

(b)

P ($)

PVIF6%  6yrs

PV

225,003.21

0.705

158,627.26

(c)

P ($)

PVIF18%  5yrs

PV

321,567.35

0.437

140,524.93

(d)

P ($)

PVIF5%  12yrs

PV

63,000.05

0.567

35721.03

Question 5

Suppose you are to receive an annuity of $325,891.12 every year for twelve years starting at the end of this year. The interest rate is 6%. What is the present value of these twelve payments?

(a)

A ($)

PVIA6% 12yrs

PV

325,891.12

8.384

2,732,271.15

The present value of the twelve payments after the annuity of $ 325,891.12 with the interest rate of 6% is $ 2,732,271.15.

Question 6

Suppose you are to receive a payment for five years amounting to $437,891.24 at the end of each year. 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?

 A ($)

PVIA 15% 5yrs

437,891.24

3.352

1,467,811.44

The bank account will have $ 1,467,811.44 after annual deposit of $437,891.24 with 15% interest.

Conclusion

The time value is a critical tool in the determination of the money that is paid in a certain job or business (Pond, 2008). The managers in a company ought to have good knowledge about the time value of money. This would give them the capacity to make rational decisions about the projects that the company is to undertake. The managers will be guided by the calculations of the time value of money (Sandel, 2012). The calculation helps them to know which projects they will appraise with certainty (Patnaik, 2009).

There are various methods that are applied in the calculation of interest that is to be acquired in present or future. These methods of calculation include the present value and future value when there are different cash flows over the years (Pond, 2008). On the other hand, when there is a constant flow of cash flow, it is called annuity.

According to the observation made from the worked out examples above, the future value of the company is larger than the present value of the base year. The difference comes about as a result of the interest rate that is earned in those years. The discounting factor is also greater than one and hence greater than the principal amount. However, the present value is less than the original value. The discounting factor is less than zero and hence values less in present value. The annuity is a constant payment that is made to a person mostly at the end of the session. The amount is accumulated with time; a lot of interest accrues from this setting of finance.

Order now

Related essays