Time Value of Money: Single Cash Flows

Introduction

Time value of money (TVM) is the foundation of mathematical finance. This assignment is designed to show you how the TVM concept can be applied to corporate finance, as well as to personal finances. You will also learn various technical terms used in finance, such as discount rate, present value, and future value.

Instructions

Answer the following questions and complete the following problems, as applicable. Unless otherwise directed, assume annual compounding periods in computational problems.You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

• Question 1:
  • Proficient-level: “List and describe the purpose of each part of a time line with an initial cash inflow and a future cash outflow” (Cornett et al., 2019, p. 107).
  • Distinguished-level: “Which cash flows should be negative and which positive?” (Cornett et al., 2019, p. 107).
• Question 2:
  • Proficient-level: “How are the present value and future value related?” (Cornett et al., 2019, p. 107).
  • Distinguished-level: Using time value of money concepts, explain why a dollar received today is worth more than a dollar received a year from now.
• Question 3:
  • Proficient-level: How are future values affected by changes in interest rates; that is, is there a direct (positive) or inverse effect on future values given a change in the interest rate?
  • Distinguished-level: “How are present values affected by changes in interest rates?” (Cornett et al., 2019, p. 107); that is, is there a direct (positive) or inverse effect on present values given a change in the interest rate?
• Question 4:
  • Proficient-level: “How much would be in your savings account in 11 years after depositing $150 today, if the bank pays 7 percent per year?” (Cornett et al., 2019, p. 108).
    • Recalculate the savings account balance, using a 6 percent interest rate, and again, using an 8 percent interest rate.
  • Distinguished-level: Describe the relationship between changes in interest rates and the ensuing changes in future values.
• Question 5:
  • Proficient-level: “A deposit of $350 earns the following interest rates: (a) 8 percent in the first year, (b) 6 percent in the second year, and (c) 5.5 percent in the third year. What would be the third year future value?” (Cornett, Adair, & Nofsinger, 2019, p. 108).
  • Distinguished-level: Explain why the future value is not calculated as the average of the annual interest rates.
• Question 6:
  • Proficient-level: “Compute the present value of an $850 payment made in 10 years when the discount rate is 12 percent” (Cornett et al., 2019, p. 108).
    • Recalculate the present value, using an 11-percent discount rate, and again, using a 13-percent discount rate.
  • Distinguished-level: Describe the relationship between changes in interest rates and the ensuing changes in present values.
• Question 7:
  • Proficient-level: “What annual rate of return is earned on a $5,000 investment when it grows to $9,500 in five years?” (Cornett et al., 2019, p. 109).
    • Recalculate the rate of return, assuming the growth occurred in four years, and again, assuming the growth occurred in six years.
  • Distinguished-level: Describe the relationship between changes in the amount of time and the changes in annual rate of return.

Submit your completed assignment as an attachment in the assignment area. You may use either a Word document or an Excel spreadsheet for your work, but not both. Prior to submitting your assignment, review the Time Value of Money: Single Cash Flows Scoring Guide to ensure you have met all of the requirements and as a self-assessment of your work.

Reference

• Cornett, M., Adair, T., & Nofsinger, J. (2019). M: Finance (4th ed.). New York, NY: McGraw-Hill.

Resources

• Time Value of Money: Single Cash Flows Scoring Guide.