FIN 501- Strategic Corporate Finance
Module 2: Case Study
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
A. $500 if invested for five years at a...