Time Value of Money Essay Example | Topics and Well Written Essays - 1000 words

Time measure of Money - Essay casefulIt is based on the simple premise that A penny in hand today is price more than a penny in hand tomorrow. This is on the basis of assumption that the coin in hand today can be invested in various investment options which go away ontogeny the amount. Moreover, there is also an opportunity cost that is associated with the currency that is sure later. This is the cost of the best foregone opportunity that could have been taken with the cash available (Econedlink.org, 2011). Cash received later cant be used for any investment options grant at the current date frame. The invention finds significant applications in the area of capital budgeting, lease versus buy decisions, accounts receivable analysis, financing arrangements, mergers and pension funding (Ross et.al., 2007, pg. 60). The concept of magazine value of money is used in every financial decision. This is done through two types of computation. whiz includes calculating the defer v alue of the cash that will be received at a later stage while the other calculates the hereafter value of the cash that is received now. One very heavy concept related to the time value of money is the Net Present Value (NPV). It is the sum of the present value of all the cash inflows minus the present value of its costs (Brigham & Ehrhardt, 2010, pg. 183). Net present finds manipulation in evaluating if the proposed projects shall be taken or not. If the net present value of the inwardness project cash flows is negative, it should not be taken. The concept of the time value of money also finds application in evaluating the present value of various investment options such as bonds and stocks and identifying the best option to invest. 2. The formula for calculation of in store(predicate) value assuming that compound interest is given is r is the crop of interest and n is the time period (Bierman & Smidt, 2003, pf. 17). a.) Present Value = $15,000 n = 5 geezerhood r = 7% b.) Pr esent Value = $19,500 n = 3 long time r = 4% c.) Present Value =$ 29,900 n = 7 years r = 2% d.) Present Value = $14,200 n = 10 years r = 0.9% 3. The formula for the calculation of present value for a given future value assuming application of compound rate of interest is r is the rate of interest and n is the time period. a.) Future Value = $17,500 r = 4% n = 3 years b.) Future Value = $41,000 r = 5% n = 5 years c.) Future Value = $120,000 r = 12% n = 2 years d.) Future Value = $790,000 r = 1% n = 8 years 4. Let us assuming that we are getting the defrayment at the beginning of the years. The cash flow timeline looks like Calculating the present value of the three future payments at the interest rate, r of 4% where, Present Value (Yi) is the present value of the cash received in year i The total present value is Thus the present value of the bombard of annual payments is $519,497. 5. Let us assuming that we are getting the payment at the beginning of the years. The comparable is d eposited into a bank account at the same time. The cash flow for the bank account will be 6. Calculating the future value of the three payments at the end of third year at an interest rate of r = 2%, we get where Future Value (Yi) is the future value at the end of three years for the cash deposited in the bank account in year i. The total Future value at the end of three years is Thus, we can see that the amount in the bank account at the end of three years is $374,592 Conclusion We studied the importance of the concept of time value of money and calculated the same for different scenarios. The analysis enables us to