the person holds today is worth more because it can be invested and earn interest (Web Finance‚ Inc.‚ 2007). The following paper will explain how annuities affect TVM problems and investment outcomes. The issues that impact TCM will also be discussed: Interest rates and compounding (with two problems)‚ present value‚ future value‚ opportunity cost‚ annuities and the rule of ’72. The idea of TVM allows managers or investors the capability to understand the advantages and future cash flow of the cost
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as the number of periods involved and the applied interest rate. For this reason‚ the concept of the time value of money can be calculated by several financial applications. The financial applications consist of future values and present values‚ annuity‚ and yield of an investment‚ which will be discussed. When considering the above example of setting aside funds for college‚ the parent may need to be aware of various future and present values of money. 50 years from now “tuition at an average
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F J Answer: a EASY 7. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. a. True b. False (28.2) Compounding F J Answer: b EASY 8. Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods. a. True b. False (28.2) Compounding F J Answer: a EASY 9. Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts. a. True b. False
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Multiple Choice Questions 1. An annuity stream of cash flow payments is a set of: A. level cash flows occurring each time period for a fixed length of time. B. level cash flows occurring each time period forever. C. increasing cash flows occurring each time period for a fixed length of time. D. increasing cash flows occurring each time period forever. E. arbitrary cash flows occurring each time period for no more than 10 years. 2. Annuities where the payments occur at the end of
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TIME VALUE 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
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possession is worth more than that same amount of money promised in the future (Garrison‚ 2006). Today money can be invested to earn interest and therefore will be worth more in the future (Brealey‚ Myers‚ & Marcus‚ 2004). This paper will explain how annuities affect time value of money (TVM) and investment outcomes. In addition‚ this paper will briefly address the impact of discount and interest rates‚ present value‚ future value‚ opportunity cost and the impact interest has on money being borrowed.
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CHAPTER 5 The Time Value of Money CHAPTER ORIENTATION In this chapter the concept of a time value of money is introduced‚ that is‚ a dollar today is worth more than a dollar received a year from now. Thus if we are to logically compare projects and financial strategies‚ we must either move all dollar flows back to the present or out to some common future date. CHAPTER OUTLINE I. Compound interest results when the interest paid on the investment during the first period
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the firm save money today by investing in shorter-lived projects (such as less durable machinery)? ⇒ This is a job for Equivalent Annual Annuities 2. Investment timing and replacement decisions: ⇒ Should you invest in a new computer system today or invest in a new computer system next year? ⇒ When should existing machinery be replaced? Equivalent Annual Annuities Example: • You own a hotel in Bend. The location is killer but the place is run down. • Remodeling will cost you $100‚000 but generate
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with a local bank. As part of its evaluation process‚ you must take an examination on time value 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. ANSWER: [Show S5-1 through S5-4 here.] A time line is a graphical representation that is used to show the timing of
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Discounted Cash Flow Valuation Chapter 6 D.Chotee FTX2020F 2013 Chapter objectives Be able to compute the future and present value of multiple cash flows Understand what an annuity is and how to calculate its present and future value How to calculate the present value of a perpetuity Appreciate the effects of compounding on interest rate quotations Understand how loans are amortized or paid off D.Chotee FTX2020F 2013 Readings Chapter 6: 6.1‚ 6.2‚ 6.3‚ 6.4 D.Chotee FTX2020F
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