According to Wikipedia.com, “Present value is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis.” (1) In this paper, we are going to examine why the concept of present value is so important to corporate finance. We are also going to complete some example problems concerning present value, future value and annuities. Let’s examine why the concept of present value is important to corporate finance and why it’s often the first topic taught in any finance class.

Why is the concept of present value important to corporate finance? According to Wikipedia.com, “The concepts of present and future value hinge upon the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal.”(2) Present value is important to corporate finance because it represents the value of the money at that time that’s available to use for another opportunity. The common example is if you would accept $1000 today or 5 years from now. With $1000 today, you could invest it and make money off of it for the next 5 years whereas $1000 given to you 5 years from today is still only $1000. Corporations are the same as us; they exist to make money for the shareholders. That is why the concept of present value is important to corporate finance. Let’s take a look at some examples of present and future value to help explain the importance of present value. 2. Calculate the future value of the following: Future Value = Present Value * (1+r) T A. $600 if invested for five years at a 9% interest rate

...MGCR 341: Finance 1
Vadim di Pietro
Assignment 1: Solutions
Topic: Timevalue of money: Retirement savings problem
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1) Today is July 1, 2010. You just graduated university. You plan to take a year off to travel and then start work one year from today. Your first monthly salary of $5,000 will be paid on August 1, 2011. Assume your monthly salary will increase by 0.8% each month thereafter, until you retire. Suppose that you plan to retire on July 1, 2041, right after receiving your last paycheck on that same day. For each pay check, you save a fraction of your salary and the rest is used to pay off your bills. You expect to live for another 40 years after the day you retire. Your goal is to save enough of each pay check such that in retirement you can afford to purchase each month the same amount of goods that $1,000 can buy today. Assume that in retirement your purchases are made each month with the first purchase on August 1, 2041, and the last purchase on July 1, 2081.
The inflation rate is 0.5% per month, and the nominal interest rate is 12% APR, with monthly compounding.
a) What is the per-month real interest rate?
The nominal monthly interest rate is given by APR/12 = 12%/12 = 1%.
If nominal dollars grow by 1% per month, but prices increase by 0.5% per month, then the purchasing power of a risk free investment increases by the real monthly interest rate of
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b) What is...

...and Future Price of Money
Trident University International
FIN 501
Module 2: Case Assignment
Dr. John Halstead
One of the most important concepts about saving and investing is the timevalue of money. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. This means money paid out or received in the future is not equivalent to money paid out or received today because inflation erodes money’s buying power. Basically, the power of time is on a person’s side and the premise that cash in hand today is more valuable than the same amount in the future due to its capability of earning interest. There are three factors affecting how much an investment will grow: time, money, and interest rate. TimeValue of Money is a concept that is very important in financial management. It affects business, personal, and government finance (Harvey, 2012) Within this paper we will discuss the definition of TimeValue of Money and identifies the importance of financial managers understanding the concept.
Time, Money and Interest Rates
Time has an important impact on the future value of...

...Introduction
The timevalue of money is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. The timevalue of money can be defined as the value of money received today instead of in the future. This is based on the premise that cash in hand today is more valuable than the same amount in the future due to its capability of earning interest. For investors, this is single most important concept in the world of finance. This paper will discuss the different financial applications of the timevalue of money. This paper will also describe the components of interest and highlight various methods of calculating timevalue of money using different interest scenarios.
Financial Applications of the TimeValue of MoneyTimevalue of money has many useful applications. One of the most important uses is that it helps to measure the trade-off in spending and saving. This can have important consequences for your personal budgeting. If market interest rates are at 5%, one may decide that the timevalue of money is greater in the...

...TimeValue of Money
The timevalue of money (TVM) or, discounted present value, is one of the basic concepts of finance and was developed by Leonardo Fibonacci in 1202. The timevalue of money (TVM) is based on the premise that one will prefer to receive a certain amount of money today than the same amount in the future, all else equal. As a result, when one deposits money in a bank account, one demands (and earns) interest. Money received today is more valuable than money received in the future by the amount of interest we can earn with the money. If $90 today will accumulate to $100 a year from now, then the present value of $100 to be received one year from now is $90.
To fully understand timevalue of money one must first understand a few terms. Present value and future value are totally different. They also have their disadvantages and advantages; it just depends on how they are used. Of course, present value is what you have right now at this present time. While future value is the amount of money you will have at a given time in the future. Future value has a tendency to...

...TimeValue of Money (TVM), developed by Leonardo Fibonacci in 1202, is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities.
TVM is based on the concept that a dollar today is worth more than a dollar in the future. That is mainly because money held today can be invested and earn interest.
A key concept of TVM is that a single sum of money or a series of equal, evenly-spaced payments or receipts promised in the future can be converted to an equivalent value today. Conversely, one can determine the value to which a single sum or a series of future payments will grow to at some future date.
The timevalue of money serves as the foundation for all other notions in finance. It impacts business finance, consumer finance and government finance. Timevalue of money results from the concept of interest.
Key Components of TimeValue of Money
Present Value is an amount today that is equivalent to a future payment, or series of payments, that has been discounted by an appropriate interest rate. The future amount can be a single sum that...

...In financial management, one of the most important concepts is the TimeValue of Money (TVM). TimeValue of Money concepts helps a manager or investors understand the benefits and the future cash flow to help justify the initial cost of the project or investment. Many of the assets businesses and individuals own are financed with money borrowed from others, so the understanding of TVM is crucial to making good buying decisions. To recognize how annuities affect the timevalue of money, managers need to consider the factors of interest rate, opportunity costs, future and present values of money, and compounding.
Interest Rates and CompoundingIn most business cases, borrowing money is not necessarily a free enterprise. It costs companies money to obtain funds on credit to finance various aspects of their business. The fee that a borrower pays to a lender for use of its money is interest. The annual percentage rate (APR) makes assumptions based on simple interest, which is interest only earned on the principal investment.
Another method of accruing interest is through compounding. Compound interest is not only charged on the original investment, but also assessed on the interest charged or earned for each period. "When comparing interest rates, it is...

...TimeValue of Money Practice Problems − Solutions
Dr. Stanley D. Longhofer 1) Jim makes a deposit of $12,000 in a bank account. The deposit is to earn interest annually at the rate of 9 percent for seven years. a) How much will Jim have on deposit at the end of seven years? P/Y = 1, N = 7, I = 9, PV = 12,000, PMT = 0 ⇒ FV = $21,936.47 b) Assuming the deposit earned a 9 percent rate of interest compounded quarterly, how much would he have at the end of seven years? P/Y = 4, N = 7 × 4 = 28 ⇒ FV = $22,374.54 c) In comparing parts (a) and (b), what are the respective effective annual yields? Which alternative is better? Because interest in compounded annual in part (a), the effective annual rate is the same as the nominal rate: EARA = 9%. In part (b), EARB = (1 + i/m)m – 1 = 1.02254 – 1 = 9.31%. This can be also solved using the TI BAII+ using the Interest Conversion worksheet. Simply press [2nd] [I Conv] (the second function of the 2 key) to bring up this worksheet. When the screen says NOM = press [9] and [Enter]. Then arrow up and make sure that [C/Y] reads 4 compounding periods per year; if not, press [4] and [Enter]. Finally arrow up to the EFF screen and press [CPT] to compute the effective annual rate. Alternative (b) is preferred because it compounds your interest more frequently. Thus you get to earn “interest on your interest” sooner. 2) John is considering the purchase of a lot. He can buy the lot today and expects the...

...FIN2110 Finance Basics for Managers Fall 2011
TimeValue of Money Problems
Calculating Future Values
Assume you deposit $10,000 today in an account that pays 6% interest. How much will you have in five years?
= $10,000 (FVIF of 6%, 5years)
= $10,000 * 1.3382
= $13,382
Calculating Present Values
Suppose you have just celebrated your 19th birthday. A rich uncle has set up a trust fund for you that will pay you $150,000 when you turn 30. If the relevant discount rate is 9%, how much is the fund worth today?
We know,
Present Value = Future Cash Flow / (1 + Required Rate of Return) ^Number of Years You Have To Wait For The Cash Flow
Given,
Present value = $150,000 / (1 + .09) ^ 11
= $150,000 / 2.5804
= $ 58,130
Therefore,
The present value is thus about $58,130.
Calculating Rates of Return
You’ve been offered an investment that will double your money in 10 years. What rate of return are you being offered? Use the Rule of 72 to calculate the answer.
Suppose, we spend $1,000, than according the question the money will be double in 10 years which will $2,000. So,
Present value = $1,000
Future Value = $2,000
Time = $ 10 year
$2,000 = $1,000 * (1 + r)^10
2 = (1 + r) ^10...

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