WHY IS THE CONCEPT OF PRESENT VALUE SO IMPORTANT FOR CORPORATE FINANCE? The importance of concept of present value to the world of corporate finance is that present value calculations are widely used in business and economics to provide a means to compare cash flows at different times. Present Value’s definition and simplistic formula used for normal purchases, the concept’s importance to corporate finance and why present value is the very first topic taught in finance classes explain that present value is an essential knowledgeable tool to ensure we make the best decisions with our money. However, first, What Does Present Value - PV Mean? Present value is “the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations.” Through the definition itself, an importance to corporate finance is explained as well as why professors begin a finance course with a basis explanation in the time value of money – discounting and investment risk included. In more detail, capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are made with several criteria to consider, and where corporate management seeks to maximize value in the firm by the correctly calculated net present value when valued using an appropriate discount rate. It would be beneficial on a personal level for the following reasons; “Learning how to use a financial calculator to make present value calculations can help you decide whether you should accept a cash rebate, 0% financing on the purchase of a car or to pay points on a mortgage.” Present value could often the first topic taught in any finance class, due to the fact that knowledge of this formula can be used for basic financial planning that will lead to larger level strategy – making the best company investment decisions. Now, on to the fun stuff that is so anxiously taught in class – the problems and formulas.

2a. $500 if invested for five years at a 4% interest rate:

End of Year1234567
Principal$9,100.00$9,373.00$9,654.19$9,943.82$10,242.13$10,549.39$10,865.88 Interest$273.00$281.19$289.63$298.31$307.26$316.48$325.98 Total$9,373.00$9,654.19$9,943.82$10,242.13$10,549.39$10,865.88$11,191.85

2d. $1000 if invested for ten years at a 0.5% interest rate:

...Essay.
Net Presentvalue is the difference between an investment’s market value and its cost. For an example, you invest 100 dollars (Cost) into a lemonade stand but you receive 50 dollars (Market Value) of cash inflow. Another would be you buy a house for 50,000(Cost) But you sell it for 75,000(Market Value). Your net presentvalue An Investment should be accepted if the net...

...
Net presentValue, Mergers and acquisitions
Abstract
Main objective of undertaking this to report was learn about NPV presentvalue (NPV) method to make capital budgeting decision(Google NEW Project) and success factors involved in mergers and acquisitions(Google-Groupon Case).
Answers to the Assignments
Part I: Google should go ahead with the new project.
Part-II: Google’s acquisition of Groupon would have been win...

...Net presentvalue
In finance, the net presentvalue (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the presentvalues (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of...

...-------------------------------------------------
FINC5001 Capital Market and Corporate Finance
-------------------------------------------------
Workshop 5 – Capital Budgeting II
1. Basic Concepts Review
a) In applying Net PresentValue, what factors do we include, and what factors do we ignore?
Use cash flows not accounting income
Ignore
* sunk costs
* financing costs
Include
* opportunity costs
* side effects...

...Presentvalue is where the value on a set date of a future payment is discounted to reflect the time value of money and other factors. This can also apply to a series of future payments. Presentvalue calculations are commonly utilized in business and economics to provide a way to compare cash flows at different times. Presentvalue can be described as the current worth of a future...

...Part I
A. PresentValue with Discount rate of 7% = 15000/(1+7%) = 15000/1.07 = $14,018.69
PresentValue with Discount rate of 4% = 15000/(1+4%) = 15000/1.04 = $14,423.08
B. Account A - PresentValue with Discount rate of 6% = 6500/(1+6%) = 6500/1.06 = $6,132.08
Account B - PresentValue with Discount rate of 6% = 12600/(1+6%)^2 = 12600/1.1236 = $11,213.96
C....

...liability. Investors in corporations have limited liability. They can lose their investment, but no more.
Chapter 2
How to calculate Presentvalues
Question 6: Perpetuities
An investment costs $1,548 and pays $138 in perpetuity. If the interest rate is 9%, what is the NPV?
Answer
NPV = −1,548 + 138/.09 = −14.67 (cost today plus the presentvalue of the
perpetuity).
Question 7: Growing perpetuities
A common stock...

...1. Basic presentvalue calculations
Calculate the presentvalue of the following cash flows, rounding to the nearest dollar:
a. A single cash inflow of $12,000 in five years, discounted at a 12% rate of return.
b. An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return.
c. A single receipt of $15,000 at the end of Year 1 followed by a single receipt of $10,000 at the end of Year 3. The company has a...

607 Words |
3 Pages

Share this Document

Let your classmates know about this document and more at StudyMode.com

## Share this Document

Let your classmates know about this document and more at StudyMode.com