Studying The Time Value Of Money Finance Essay

The construct of present value is really of import in corporate finance, and in any concern because “ The clip value of money ( TVM ) is the basic mathematics of puting and is the footing of all fiscal computations ” ( Investing in Mutual Funds, 2010, paragraph 1 ) . It is suggested that corporations have a good apprehension of the clip value of money construct by using the company ‘s present value to find “ expected and existent returns on investings ” ( Investing in Mutual Funds, 2010, paragraph 1 ) .

A corporation that utilizes the present values computation is better able to do effectual fiscal determination in footings of involvement and non involvement earned, bad debt generated from loans, budgeting, and assorted other corporate fiscal determinations ( University of West Florida, n.d ) . Calculating the present value can move as fiscal route map for corporations.

Future Value Calculations

$ 500 if invested for five old ages at a 4 % involvement rate

$ 500.00 ( 1 + 4 % ) 5th =

$ 500.00 ( 1.04 ) 5th = $ 608.00

End of Year:

1

2

3

4

5

Principal:

$ 500

$ 520

$ 540.80

$ 562.43

$ 608.33

Interest:

$ 20

$ 20.8

$ 21.63

$ 22.5

Sum:

$ 520.00

$ 540.80

$ 562.43

$ 608.33

To find the Future Value of $ 500 dollars invested for 5 old ages at a 4 % involvement rate, the Future Value: $ 500 was multiplied by 1 plus the involvement rate 4 % ( 1.04 ) times the figure of old ages invested ( 5 ) . After one twelvemonth of puting $ 500 at a 4 % ( 1.04 ) the future value is $ 520.00 with $ 20 of accrued involvement. The involvement accrued was determined by multiplying the principal of $ 500 by 1 plus 4 % ( 1.04 ) , which equals $ 520.00 ( Principal after one twelvemonth ) , so, $ 520.00 ( Principal after one twelvemonth ) minus $ 500 ( get downing Principal ) = $ 20. This measure is repeated for the 5 twelvemonth increase by multiplying the twelvemonth terminal sum with 1 plus 9 % ( 1.09 ) to find the future value of $ 500 if invested for five old ages at a 4 % involvement rate. To find the involvement gained per twelvemonth each old ages principal was subtracted by the twelvemonth ends entire

B. $ 150 if invested for three old ages at a 9 % involvement rate

150.00 ( 1 + 9 % ) 3rd =

150.00 ( 1.09 ) 3rd = $ 194.25

To find the Future Value of $ 150 dollars invested for 3 old ages at a 9 % involvement rate, the Future Value: $ 150 was multiplied by 1 plus the involvement rate 9 % ( 1.09 ) times the figure of old ages invested. After one twelvemonth of puting $ 150 at a 9 % ( 1.09 ) the future value is $ 163.5 with $ 13.50 of accrued involvement. The involvement accrued was determined by multiplying the principal of $ 150 by 1 plus 9 % ( 1.09 ) , which equals $ 163.50 ( Principal after one twelvemonth ) , so, $ 163.50 ( Principal after one twelvemonth ) minus $ 150.00 ( get downing Principal ) = $ 13.50. This measure is repeated for the 3 twelvemonth increase by multiplying the twelvemonth terminal sum with 1 plus 9 % ( 1.09 ) to find the future value of $ 150 if invested for three old ages at a 9 % involvement rate. To find the involvement gained per twelvemonth each old ages principal was subtracted by the twelvemonth ends entire.

c. $ 9100 if invested for seven old ages at an 3 % involvement rate:

Same expression was used as in the above subdivisions. However the reply for degree Celsius is as follows.

$ 9100.00 ( 1 + 3 % ) 7th =

$ 9100.00 ( 1.03 ) 7th = $ 11,147.89

d. $ 1000 if invested for 10 old ages with a 0.5 % involvement rate:

Same expression was used as in the above subdivisions. However the reply for degree Celsius is as follows.

$ 1000.00 ( 1 + 0.05 % ) 10th =

$ 1000.00 ( 1.005 ) 10th = $ 1,051.14

Present Value Calculations

$ 7700 to be received three old ages from now with a 5 % Interest rate

To find the present value of $ 7700 to be received 3 old ages from now with an involvement rate of 5 % the undermentioned computations were used:

$ 7700 ( Future value ) x 5 % ( involvement per yr. ) = $ 385.00 ( involvement gained, yr. 3 )

$ 7700 ( Future Value ) – $ 385.00 ( involvement gained ) = $ 7315 ( 2nd yr. future value )

$ 7315 ( 2nd yr. future value ) x 5 % ( involvement ) = $ 365.75 ( involvement gained, yr. 2 )

$ 7315 ( 2nd yr. future value ) – $ 365.75 ( gained ) = $ 6949.25 ( 1st yr. future value )

$ 6949.25 ( 1st yr. future value ) x 5 % ( involvement ) = $ 347.47 ( involvement gained, yr. 1 )

$ 6949.25 ( 1st yr. future value ) – $ 347.47 ( gained ) = $ 6601.98

Present value = $ 6601.98

B. $ 1500 to be received five old ages from now with a 7 % involvement rate

To find the present value of $ 1500 to be received 5 old ages from now with an involvement rate of 7 % the undermentioned computations were used:

$ 1500 ( Future value ) x 7 % ( involvement per yr. ) = $ 105.00 ( involvement gained, yr. 5 )

$ 1500 ( Future Value ) – $ 105.00 ( involvement gained ) = $ 1395 ( 5th yr. future value )

$ 1395 ( 4th yr. future value ) x 7 % ( involvement ) = $ 97.65 ( involvement gained, yr. 4 )

$ 1395 ( 4th yr. future value ) – $ 97.65 ( gained ) = $ 1297.35 ( 4th yr. future value )

$ 1297.35 ( 3rd yr. future value ) x 7 % ( involvement ) = $ 90.81 ( involvement gained, yr. 3 )

$ 1297.35 ( 3rd yr. future value ) – $ 90.81 ( gained ) = $ 1206.84 ( 5th yr. future value )

$ 1206.84 ( 2nd yr. future value ) x 7 % ( involvement ) = $ 84.48 ( involvement gained yr, 2 )

$ 1206.84 ( 2nd yr. future value ) – $ 84.48 ( gained ) = $ 1,122.36

$ 1,122.36 ( 1st yr. future value ) x 7 % = $ 78.57 ( involvement gained, yr. 1 )

$ 1,122.36 ( 1st yr. future value ) – $ 78.57 ( gained ) = $ 1043.79

Present value = $ 1,122.36

c. $ 7200 to received two old ages from now with a 11 % involvement rate:

To find the present value of $ 7200 to be received 2 old ages from now with an involvement rate of 11 % the undermentioned computations were used:

$ 7200 ( Future value ) x 11 % ( involvement per yr. ) = $ 792.00 ( involvement gained, yr. 2 )

$ 7200 ( Future Value ) – $ 792.00 ( involvement gained ) = $ 6408 ( 2nd yr. future value )

$ 6408 ( 1st yr. future value ) x 11 % ( involvement ) = $ 704.88 ( involvement gained, yr. 1 )

$ 6408 ( 1st yr. future value ) – $ 704.88 = 5703.12

Present value = $ 5,703.12

d. $ 680,000 to be received eight old ages from now with a 9 % involvement rate:

To find the present value of $ 680,000 to be received 8 old ages from now with an involvement rate of 9 % the undermentioned computations were used:

$ 680,000 ( Future value ) x 9 % ( involvement per yr. ) = $ 61,200 ( involvement gained, yr. 8 )

$ 680,000 ( Future Value ) – $ 61,200 ( involvement gained ) = $ 618,800 ( 8th yr. FV )

$ 618,800 ( 7th yr. future value ) x 9 % ( involvement ) = $ 55,692 ( involvement gained, yr. 7 )

$ 618,800 ( 7th yr. future value ) – $ 55,692 ( gained ) = $ 563,108 ( 7th yr. FV )

$ 563,108 ( 6th yr. future value ) x 9 % ( involvement ) = $ 50,679.72 ( involvement gained, yr. 6 )

$ 563,108 ( 6th yr. future value ) – $ 50,679.72 ( gained ) = $ 512,428.28 ( 6th yr. FV )

$ 512,428.28 ( 5th yr. future value ) x 9 % ( involvement ) = $ 46,118.55 ( involvement gained yr, 5 )

$ 512,428.28 ( 5th yr. future value ) – $ 46,118.55 ( gained ) = $ 466,309.73 ( 5th yr. FV )

$ 466,309.73 ( 4th yr. future value ) x 9 % = $ 41,967.85 ( involvement gained, yr.4 )

$ 466,309.73 ( 4th yr. future value ) – $ 41,967.85 ( gained ) = $ 424,341.88 ( 4th yr. FV )

$ 424,341.88 ( 3rd yr. future value ) x 9 % ( involvement ) = $ 38,109.77 ( involvement gained, yr. 3 )

$ 424,341.88 ( 3rd yr. future value ) – $ 38,109.77 ( gained ) = $ 386,151.08 ( 3rd yr FV ) .

$ 386,151.08 ( 2nd yr. future value ) x 9 % ( involvement ) = $ 34,753.60 ( involvement gained yr. 2 )

$ 386,151.08 ( 2nd yr. future value ) – $ 34,753.60 = $ 351,397.48 ( 2nd yr FV )

$ 351,397.48 ( 1st yr. future value ) x 9 % ( involvement ) = $ 31,674.37 ( involvement gained yr. 1 )

$ 351,397.48 ( 1st yr. future value ) – $ 31,674.37 ( gained ) = $ 319,723.11

Present value = $ 5,703.12

Suppose you are to have a watercourse of one-year payments ( besides called an “ rente ” ) of $ 3000 every twelvemonth for three old ages get downing this year.A The involvement rate is 3 % .A What is the present value of these three payments? The present value of these three payments is: twelvemonth 1: 2738.02, twelvemonth 2: $ 2822.70 and twelvemonth 3: $ 2910

$ 3000 ( 3rd yr future value ) x 3 % ( involvement per twelvemonth ) = $ 90 ( involvement gained yr. 3 )

$ 3000 ( 3rd. yr future value ) – $ 90 ( gained ) = $ 2910 ( present value )

$ 2910 ( 2nd yr. future value ) x 3 % ( involvement per twelvemonth ) = $ 87.30 ( involvement gained yr. 2 )

$ 2910 ( 2nd yr. future value ) – $ 87.30 ( gained ) = $ 2822.70 ( present value )

$ 2822.70 ( 1st yr. future value ) x 3 % ( involvement per twelvemonth ) = $ 84.68 ( involvement gained yr. 1 )

$ 2822.70 ( 1st yr. future value ) – $ 84.68 ( gained ) = $ 2738.02 ( present value ) .

Suppose you are to have a payment of $ 5000 every twelvemonth for three years.A You are lodging these payments in a bank history that pays 2 % interest.A Given these three payments and this involvement rate, how much will be in your bank history in three old ages? After three old ages at that place will be $ 5,294.04 in my bank history.

$ 5000 ( 3rd yr future value ) x 2 % ( involvement per twelvemonth ) = $ 100 ( involvement gained yr. 3 )

$ 5000 ( 3rd. yr future value ) – $ 100 ( gained ) = $ 4900 ( present value )

$ 4900 ( 2nd yr. future value ) x 2 % ( involvement per twelvemonth ) = $ 98.00 ( involvement gained yr. 2 )

$ 4900 ( 2nd yr. future value ) – $ 98.00 ( gained ) = $ 4802 ( present value )

$ 4802 ( 1st yr. future value ) x 2 % ( involvement per twelvemonth ) = $ 96.04 ( involvement gained yr. 1 )

$ 4802 ( 1st yr. future value ) – $ 96.04 ( gained ) = $ 4705.96 ( present value ) .