Question

1) What is the meaning of the time value of money?

2) How are compounding and discounting related?

3) What happens to the future value of a lump sum invested the longer the time period for which it will be invested?

Answer #1

1) The worth of the money you have now is more than the same amount of money you have in future. This concept is called as time value of money.

For Example, the $1000 you have now and the $1000 you have in a years' time is not equal due to it's potential earning capacity.

2) Compounding is the method used to determine future value of an investment made at present.

Disounting is the method to determine the present value of cash flows which are due to come in future.

3) When a lump sum amount is invested at present and longer the time period, the higher the amount gets due to the compounding factor.

Explain the concept of time value of money, including
compounding and discounting. Consider how time value of money
applies to your personal life by addressing the following:
Describe at least one specific personal situation in the past
where the use of time value of money concepts would have helped you
make a better decision. Explain how time value of money applies to
this situation.
Describe at least one specific personal situation that you
expect to encounter in the future where...

1. Which of the following statements is incorrect?
a. The time value of money implies that a dollar received today
is worth more than a dollar received tomorrow.
b. The time value of money implies that the further in the
future you receive a dollar, the more it is worth today.
c. All the answers are correct except one.
d. A dollar today is worth more than a dollar received in the
future.
e. The earnings from compounding drive much...

1. Time Value of Money
a. What is the present value of a $2,000 lump sum to be
paid in six years if interest rate is 5%?
b. Suppose you deposit $1,000 today in an account that
pays 8% APR. How many years will it take the account balance to
grow to $3,000 if interest is compounded quarterly?

Given an imterst rate of 1%, the future value of a lump sum
invested today will always:
A. remain constant, regardless of the investment time
period.
B. decrease if the investment time period is shortened.
C. decrease if the investment time period is lengthened.
D. be equal to $0

Time Value of Money
a. What is the present value of a $2,000 lump sum to be paid in
six years if interest rate is 5%?
b. Suppose you deposit $1,000 today in an account that pays 8%
APR. How many years will it take the account balance to grow to
$3,000 if interest is compounded quarterly?

Time Value of Money
What is the present value of a $2,000 lump sum to be paid in
six years if interest rate is
5%?
Suppose you deposit $1,000 today in an account that pays 8%
APR. How many yearswill it take the account
balance to grow to $3,000 if interest is compounded quarterly?

1)
How does a changing interest rate affect the value of money over
time?
2) In the Ginny's restaurant case, how do we leverage
potential future cash flows to attain funds today?
3) How would our decisions change in the Ginny's restaurant
case based on our expectation of future interest rates? What would
we do if we expect the Fed to continue to increase rates over the
next year-- does it change our decisions?

1. Money market assets (cash & accounts receivables) have a
longer term to maturity and are thus more volatile that capital
market assets (stocks & bonds).
True or false
2. Maximizing shareholder value of the firm is the primary goal
of financial management.
True or false?
3. Using semi-annual compounding rather than annual compounding
will increase the future value of a single sum or n annuity.
True or false?

What is the time value of money?
a. The monetary value of a project’s future net cash flows at
time zero.
b.Funds received today are worth less than the same amount
received in the future because of depreciation.
c.monetary value of accountants’ time spent on a project.
d.Funds received today are worth more than the same amount
received in the future because those funds could be invested today
and earn interest in the interim.

Compounding Periods - As you increase the lenth of time
involved, what happens to future values ? what happens to presnt
values?

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