'Concept of Present Value\r'

'WHY IS THE CONCEPT OF founder VALUE SO IMPORTANT FOR CORPORATE pay? The importance of concept of correspond measure to the valet of corpo array pay is that present abide by calculations be widely utilise in business and political economy to provide a means to comp ar money flows at different times. benefaction nourish’s explanation and simplistic formula used for figure purchases, the concept’s importance to corporate finance and why present value is the very for the first time content taught in finance classes explain that present value is an essential knowledgeable tool to delay we make the trump decisions with our money. However, first, What Does Present Value †PV basal?\r\nPresent value is â€Å"the current worth of a future sum of money or flowing of coin flows given a specified rate of return. Future notes flows are synthesised at the discount rate, and the higher the discount rate, the lower the present value of the future cash flow s. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations. ” Through the definition itself, an importance to corporate finance is explained as surface as why professors begin a finance course with a basis explanation in the time value of money †discounting and investment essay included.\r\nIn more detail, jacket investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are made with several criteria to consider, and where corporate forethought seeks to maximize value in the firm by the correctly calculated net present value when valued using an appropriate discount rate. It would be beneficial on a personal level for the following reasons; â€Å"Learning how to use a pecuniary calculator to make present value calculations female genitals help you decide whether you should accept a cash rebate, 0% financing on the purchase of a car or to pay points on a mortgage. Present value could often the first topic taught in any finance class, due to the fact that knowledge of this formula can be used for basic financial planning that will provide to larger level strategy †making the best company investment decisions. Now, on to the fun poppycock that is so anxiously taught in class †the problems and formulas. 2a. $ cholecalciferol if invested for five course of instructions at a 4% interest rate: FV = 500 (1 + . 04)^1) = 500 (1. 04) = $520. 00 FV = 520 (1 + . 04)^2) = 520 (1. 0816) = $540. 80 FV = 540. 80 (1 + . 04)^3) = 540. 80 (1. 124864) = $562. 43 FV = 562. 43(1 + . 04)^4) = 562. 43(1. 169859) = $584. 3 FV = 584. 93(1 + . 04)^5) = 584. 93 (1. 216653) = $608. 33 residuum of Year12345 oral sex$500. 00$520. 00$540. 80$562. 43$584. 93 amour$20. 00$20. 80$21. 63$22. 50$23. 40 join$520. 00$540. 80$562. 43$584. 93$608. 33 2b. $ one hundred fifty if invested for three years at a 9% interest rate: FV = 150 (1 + . 09)^1) = 150 (1. 09) = $163. 50 FV = 163. 50(1 + . 09)^2) = 163. 50(1. 1881) = $178. 22 FV = 178. 22 (1 + . 09)^3) = 178. 22 (1. 295029) = $194. 25 End of Year123 Principal$150. 00$163. 50$178. 22 Interest$13. 50$14. 72$16. 04 Total$163. 50$178. 22$194. 25 2c. $9100 if invested for seven years at a 3% interest rate:\r\nFV = 9100 (1 + . 03)^1) = 9100 (1. 03) = $9373 FV = 9373 (1 + . 03)^2) = 9373 (1. 0609) = $9654. 19 FV = 9654. 19 (1 + . 03)^3) = 9654. 19 (1. 092727) = $9943. 82 FV = 9943. 82 (1 + . 03)^4) = 9943. 82 (1. 12550881) = $10242. 13 FV = 10242. 13 (1 + . 03)^5) = 10242. 13 (1. 15927407) = $10549. 39 FV = 10549. 39 (1 + . 03)^6) = 10549. 39(1. 1940523) = $10865. 88 FV = 10865. 88(1 + . 03)^7) = 10865. 88 (1. 22987387) = $11191. 85 End of Year1234567 Principal$9,100. 00$9,373. 00$9,654. 19$9,943. 82$10,242. 13$10,549. 39$10,865. 88 Interest$273. 00$281. 19$289. 63$298. 31$307. 26$316. 48$325. 8 Total$9,373. 00$9,654. 19$9,943. 82$10,242. 13$10,549. 39$10,865. 88 $11,191. 85 2d. $ potassium if invested for ten years at a 0. 5% interest rate: FV = 1000 (1 + . 005)^1) = 1000 (1. 005) = $1005 FV = 1005 (1 + . 005)^2) = 1005 (1. 010025) = $1010. 03 FV = 1010. 03 (1 + . 005)^3) = 1010. 03 (1. 01507513) = $1015. 08 FV = 1015. 08 (1 + . 005)^4) = 1015. 08 (1. 020150501) = $1020. 15 FV = 1020. 15 (1 + . 005)^5) = 1020. 15 (1. 02525125) = $1025. 25 FV = 1025. 25 (1 + . 005)^6) = 1025. 25(1. 03037751) = $1030. 38 FV = 1030. 38(1 + . 005)^7) = 1030. 38 (1. 0355294) = $1035. 53 FV = 1035. 53 (1 + . 05)^8) = 1035. 53 (1. 040707) = $1040. 71 FV = 1040. 71 (1 + . 005)^9) = 1040. 71(1. 0459106) = $1045. 91 FV = 1045. 91(1 + . 005)^10) = 1045. 91 (1. 0511401) = $1051. 14 End of Year12345 Principal$1,000. 00$1,005. 00$1,010. 03$1,015. 08$1,020. 15 Interest$5. 00$5. 02$5. 05$5. 08$5. 10 Total$1,005. 00$1,010. 03$1,015. 08$1,020. 15$1,025. 25 End of Year678910 Principal$1,025. 25$1,030. 38$1,035. 53$1,040. 71$1,045. 91 Interest$5. 13$5. 15$5. 18$5. 20$5. 23 Tot al$1,030. 38$1,035. 53$1,040. 71$1,045. 91$1,051. 14 Present Value †3a. $7700 to be veritable three years from now with a 5% interest rate\r\nPV = 7700 / (1 + . 05) ^ 3 = 7700 / (1. 157625) = $6651. 55 3b. $1500 to be realized five years from now with a 7% interest rate PV = 1500 / (1 + . 07) ^ 5 = 1500 / (1. 4025517) = $1069. 48 3c. $7200 to received two years from now with an 11% interest rate PV = 7200 / (1 + . 11) ^ 2 = 7200 / (1. 2321) = $ 5843. 68 3d. $ 680,000 to be received eight years from now with a 9% interest rate. PV = 680000 / (1 + . 09) ^ 8 = 680000 / (1. 9925626) = $341269. 07 Time Value of Money †Annuities 4. Present Value †Annuity / ideate you are to receive an annuity of $3000 every year for 3 years @ 3% interest rate.\r\nPV = PVAF(r,n)*CF PVAF(r,n) = 1/r †1/[r*(1+r)^n] (33. 33 †30. 50472 = 2. 828611) PV = 2. 828611*3000 PV = $ 8485. 83 5. Future Value †Annuity / Suppose you receive a payment of $5000 every year for 3 years, deposi ting into a bank that pays 2% interest. FV = CF * FVAF (r,n) FVAF(r,n) = 1/r †1/[r*(1+r)^n] (50 †47. 11612 = 2. 883883) FV = 5000 * 2. 883883 FV = $14419. 42 REFERENCES Anonymous (2010). Investopedia. com. Present Value. Retrieved on 5 Apr 2010 @ http://www. investopedia. com/terms/p/presentvalue. asp viper 2 Megginson, William (2008). Corporate Finance. Stamford: Thomson Learning. P. 86. Anonymous (2010). Investopedia. com. Explaining Present Value-PV. Retrieved on 5 Apr 2010 @ http://www. investopedia. com/terms/p/presentvalue. asp 4 Anonymous (n. d). FinanceProfessor. com. Future Value. Retrieved on 3 Apr 2010 from http://www. financeprofessor. com/fiancnenotes/introductoryfin/presentvalue. htm 5 Anonymous (n. d). FinanceProfessor. com. Present Value. Retrieved on 3 Apr 2010 from http://www. financeprofessor. com/fiancnenotes/introductoryfin/presentvalue. htm 6 Anonymous (2008). The Time Value of Money. Retrieved on 4 Apr 2010 from http://www. econedlink. org/lessons/in dex. cfm? lesson=EM37\r\n'