A retirement home at Deer Trail Estates now costs $ 185,000. Inflation is expected to cause this price to increase at 6% per year over the 20 years before G.L. Donovan retires. How large an equal, annual, end-of-year deposit must be made each year into an account paying an annual interest rate of 10% for Donovan to have the cash needed to purchases a home at retirement?

Solution:

Initial Present value of Price = $185,000
Inflation annual rate o increase= 6%
Duration= 20 years

Using Table A-1
FV of 185,000 after inflation =185000*(3.207)= $593,295

Duration= 20 years
Annual rate of return= 10%
Annuity Ordinary=??

Using Table A-3
Annuity ordinary= 593,295/57.274= 10,358.88 to be paid at every year end

2. Deposits to create a perpetuity

You have decided to endow your favorite university with a scholarship. It is expected to cost $ 6,000 per year to attend the university into perpetuity. You expect to give the university the endowment in 10 years and will accumulate it by making equal annual (end-of-year) deposits into an account. The rate of interest is expected to be 10% for all future time periods.

• How large must the endowment be?

• How much must you deposit at the end of each of the next 10 years to accumulate the required amount?

...5-42 Integrated Case
TimeValue of Money Analysis. You have applied for a job with a local bank. As part of its evaluation process, you must take an examination on timevalue of money analysis covering the following questions:
a. Draw time lines for (1) a $100 lump sum cash flow at the end of Year 2; (2) an ordinary annuity of $100 per year for 3 years; and (3) an uneven cash flow stream of -$50, $100, $75 and $50 at the end of Years 0 through 3.
(1)
100
0
1
2
100
0
1
2
(2)
I%I%
I%I%
(3)
100
50
75
0
1
2
3
-50
100
50
75
0
1
2
3
-50
b.
1. What’s the future value of $100 after 3 years if it earns 10%, annual compounding?
FV = PV (1 + I)N = $100 (1.10)3 = $133.10
2. What’s the present value of $100 to be received in 3 years if the interest rate is 10%, annual compounding?
PV = FV / (1 + I)N = $100 / 1.103 = $75.13
c. What annual interest rate would cause $100 to grow to $125.97 in 3 years?
FV = PV (1+I)N
$125.97 = $100 (1 + I)3
Using a financial calculator, I = 8.0%
d. If a company’s sales are growing at a rate of 20% annually, how long will it take sales to double?
FV = PV (1+I)N
$100,000 = $50,000 (1.02)N
Using a financial calculator, N =...

...TIMEVALUE OF MONEYTimevalue of money is useful in making informed business decisions. For example the "net present value method" can be used to help decide the best alternative among multiple alternative uses of a firm or personal financial resources. By discounting various alternatives to their "present value" one can compare the alternatives. Timevalue of money can also answer such questions as what one's investment will be worth at a certain point of time in the future, assuming a certain interest rate. Timevalue of money can also be used to compute such useful information as car, mortgage and other loanpayments. Another use of timevalue of money in accounting is reporting of certain long-term assets and liabilities.
Timevalue of money is based on the principle of compound interest. Each time there is a compounding period the new principal is increased by the interest from the previous period.
Converting Before Using the Tables
When using the tables, you may need to convert if, for example, in a lump sum situation there are more than one compounding periods in a year. Or you may need to...

...TIMEVALUE OF MONEY
I. DEFINITIONS
* A peso received today is worth more than a peso received in the future
* In economics, it is the opportunity cost of passing up the earning potential of a peso today.
* The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
* Holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
II. KEY CONCEPTS
* 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. (Present Value of Cash Flows)
* Conversely, you can determine the value to which a single sum or a series of future payments will grow to at some future date. (Future Value of Cash Flows)
III. What are the financial applications of timevalue of money?
* Equipment purchase or new product decision
* Present value of a contract providing future payments
* Future worth of an investment
* Regular payment necessary to provide a future sum
* Regular payment necessary to amortize a loan
*...

...TimeValue of Money (TVM) Assignments:
1.
Calculating Interest Rates In 2011, the automobile industry announced the average vehicle selling price
in the United States was $28,835. Five years earlier, the average price was $21,608. What was the annual
increase in vehicle selling price?
***
Enter
5
N
Solve for
2.
I/Y
5.94%
N
Solve for
5.5%
I/Y
80
10%
I/Y
Solve for
$150,000
$40,000
PV
PMT
FV
$1,000,000
PV
PMT
FV
$488.19
Calculating Interest Rates and Future Values In 1895, the first U.S. Open Golf Championship was
held. The winner’s prize money was $150. In 2003, the winner’s check was $1,080,000. What was the
percentage increase in the winner’s check over this period? If the winner’s prize increases at the same rate,
what will it be in 2040?
***
Enter
$150
108
N
Solve for
Enter
37
N
I/Y
8.57%
8.57%
I/Y
PV
$1,080,000
PMT
FV
$1,080,000
PV
Solve for
***
Enter
FV
24.69
N
5.
PMT
Calculating Present Values You have just received notification that you have won the $1 million first
prize at the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming
you’re around to collect), 80 years from now. What is the present value of your windfall if the appropriate
discount rate is 10 percent?
***
Enter
4.
PV
Calculating the Number of Periods You’re trying to save to buy a new $150,000...

...TimeValue of MoneyTimevalue of money is an amount of money available today can be safely invested to accumulate to a larger amount in the future.
Present value- an amount of money available today.
Future amount-amount receivable/payable at a future date
Relationship Between Present Values and Present Values
The difference between present value and future amount is the interest that is included in the future amount. It depends on two factors:
1. Rate of interest at which present value increases
2. Length of time over which interest accumulates
The basic concept of TimeValue of Money:
* A PV is always less than its future amount.
* A future amount is always greater than a present value
* A dollar available today is always worth more than a dollar that does not become available until a future date
* A dollar available at a future date is always worth less than a dollar that is available today
Future Value Concepts
Future Value of a Single amount
The future value of a single amount is the value at a future date of a given amount invested assuming compound interest.
Formula:
FV= p X (1+i)n
Where:
FV= future...

...
TIMEVALUE OF MONEY (CHAPTER 4)
1. Future value (FV), the value of a present amount at a future date, is calculated by applying compound interest over a specific time period. Present value (PV), represents the dollar value today of a future amount, or the amount you would invest today at a given interest rate for a specified time period to equal the future amount. Financial managers prefer present value to future value because they typically make decisions at time zero, before the start of a project.
2. A single amount cash flow refers to an individual, stand alone, value occurring at one point in time. An annuity consists of an unbroken series of cash flows of equal dollar amount occurring over more than one period. A mixed stream is a pattern of cash flows over more than one time period and the amount of cash associated with each period will vary.
3. Compounding of interest occurs when an amount is deposited into a savings account and the interest paid after the specified time period remains in the account, thereby becoming part of the principal for the following period. The general equation for future value in year n (FVn) can be expressed using the specified notation as follows:
FVn ’ PV × (1 + i)n
4. A decrease...

...article will explain the financial concept of timevalue of money. The overview provides an introduction to the principles at work when money grows in value over time. These principles include future value of money, present value of money, simple interest and compound interest. In addition, other concepts that relate to factors that can impede the growth in value of money over time are explained, including risk, inflation and accessibility of assets. Basic formulas and tables have been provided to assist in calculating various formulations of timevalue of money problems. Explanations of common financial dealings in which the timevalue of money is an important consideration, such as annuities, loan amortization and tax deferral options, are included to help illustrate the concept of the timevalue of money in everyday life.
The timevalue of money is a fundamental financial principle. Its basic premise is that money gains value over time. As a result, a dollar saved today will be worth more in the future, and a dollar paid today costs more than a dollar paid later in...

...concept of the timevalue of money and the importance of this concept in business. Also, we will provide a demonstration of the use of the formula used to calculate the present and future values of money to get the present value of $100 using different periods of time and interest rates.
TimeValue of Money
In the world of business, it is essential to know what TVM represents and how it helps make better choices in how we spend our money. TVM is also known as TimeValue of money which is a given amount of interest earned in a period of time (Wikipedia, 2011). Each member in group “C” will use 100 as our present value and we will choose an interest rate and period. Timevalue of money concept is used to determine present and future values of money. “The timevalue of money refers to the relationship between time, money, and the rate of interest.” (Letsche, 2011). The formula consist of four components FV = Future Value, PV = Present Value, i = the interestrate per period and n= the number of compounding periods (TeachMeFinance.com).
In business, TVM is used to evaluate expected...

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