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FIN501 Module 2 - Case
Essay Instructions:
In a Word document, upload your answers to the following questions below. Very importantly - show all your work. If your final answer is wrong, you can still receive partial credit if you show all of your steps and demonstrate a good understanding of the time value of money.
1. In two to three paragraphs, explain why the concept of present value is so important for corporate finance and is often the very first topic taught in any finance class. Do not focus your answer on explaining what present value is, instead focus on some specific reasons why you think it is important and why it is taught first in corporate finance classes before other topics are introduced.
2. Calculate the future value of the following:
a. $500 if invested for five years at a 7% interest rate
b. $950 if invested for three years at a 4% interest rate
c. $9900 if invested for seven years at an 2% interest rate
d. $4000 if invested for ten years with a 0.9% interest rate
3. Calculate the present value of the following:
a. $7500 to be received three years from now with a 4% Interest rate
b. $4000 to be received five years from now with a 5% interest rate
c. $1200 to received two years from now with a 12% interest rate
d. $770,000 to be received eight years from now with a 1% interest rate.
4. Suppose you are to receive a stream of annual payments (also called an "annuity") of $8000 every year for three years starting this year. The interest rate is 4%. What is the present value of these three payments?
5. Suppose you are to receive a payment of $10000 every year for three years. You are depositing these payments in a bank account that pays 2% interest. Given these three payments and this interest rate, how much will be in your bank account in three years?
Case Assignment Expectations
In the grading of your assignment, you will be assessed on the following items:
1. For the essay portion of this assignment, you should provide a direct answer to the assignment question and support your answer with solid references.
2. For the computational portions of this assignment, you should show your work and demonstrate that you understand the steps involved in your computations. Your final grade will depend not only on your final answer but also how well you illustrate the steps you took to reach your final answer.
Essay Sample Content Preview:
Question 1
Corporate finance is an area in the field of finance that deals with financial decisions which HYPERLINK "http://en.wikipedia.org/wiki/Business" \o "Business" various business enterprises make and the tools and analysis used to make these financial decisions. Its chief goal is to HYPERLINK "http://en.wikipedia.org/wiki/Maximization" \o "Maximization" maximise the firm’s value while managing the financial HYPERLINK "http://en.wikipedia.org/wiki/Risks" \o "Risks" risks that the firm is exposed to. Of significance in this area is the knowledge of present value. The present value refers to the worth of a future sum of money or stream of cash flows given a specified rate of return. It is normally computed through discounting a stream of cash flows. The concept of present value is always a prerequisite in order for one to be able to understand the field of corporate finance and this explains why it is usually taught first in the lectures of corporate finance. In fact, it acts as a stepping stone towards the mastery and understanding of the entire field as it gives the students a glimpse of what is to come or what they should expect from the whole field.
This concept is significant to the field of corporate finance because of a number of reasons. Some of these reasons explain why present value concept is largely used in corporate finance. First, present value computations are widely employed in economics and business to provide a means to make comparison of cash flows at different times. The present value is a fundamental knowledgeable tool that enables us to make the best decisions with our money.
Businesses or individuals do make investment decisions at regular intervals. These financial decisions that they make depend to a greater extent on the present value of the cash flows. For instance, if an individual wants to have a certain amount of money in his account after some period of time basically to use for future investment then through the knowledge of present value he/she will be in a position to compute the amount of money that should be invested today so that the future amount becomes realisable. In this case, the knowledge of present value facilitates the undertaking of the various investment projects that an entity, individuals or organizations would wish to undertake in future.
In addition to the importance of present value highlighted above, it is also of crucial help to financial managers in making capital budgeting decisions. This may involve choosing between mutually exclusive investment projects, projects where capital rationing is involved, substitute projects, complementary projects and also projects with different lives. The capital budgeting decision is usually arrived at by using various discounting techniques most of which employ the concept of present value.
Therefore, it is clear that in the field of corporate finance, present value concept is very vital hence its continuous application as it provides green light to mangers and students of finance in understanding the course of corporate finance and also in making prudent investment decisions.
Question 2
a) Future Value= (PVIFr%, n) ×p = (PVIF5%, 7) ×500
= 500(1+0.05)7
= 500(1.41)
= $ 703.55
b) Future Value= (PVIFr%, n) ×p = (PVIF4%, 3) ×950
= 950(1+0.04)³
= 900× (1.12)
= $ 1,068.62
c) Future Value= (PVIFr%, n) ×p = (PVIF2%, 7) ×9900
= 9900(1+0.02)7
= 9900×1.15
...
Corporate finance is an area in the field of finance that deals with financial decisions which HYPERLINK "http://en.wikipedia.org/wiki/Business" \o "Business" various business enterprises make and the tools and analysis used to make these financial decisions. Its chief goal is to HYPERLINK "http://en.wikipedia.org/wiki/Maximization" \o "Maximization" maximise the firm’s value while managing the financial HYPERLINK "http://en.wikipedia.org/wiki/Risks" \o "Risks" risks that the firm is exposed to. Of significance in this area is the knowledge of present value. The present value refers to the worth of a future sum of money or stream of cash flows given a specified rate of return. It is normally computed through discounting a stream of cash flows. The concept of present value is always a prerequisite in order for one to be able to understand the field of corporate finance and this explains why it is usually taught first in the lectures of corporate finance. In fact, it acts as a stepping stone towards the mastery and understanding of the entire field as it gives the students a glimpse of what is to come or what they should expect from the whole field.
This concept is significant to the field of corporate finance because of a number of reasons. Some of these reasons explain why present value concept is largely used in corporate finance. First, present value computations are widely employed in economics and business to provide a means to make comparison of cash flows at different times. The present value is a fundamental knowledgeable tool that enables us to make the best decisions with our money.
Businesses or individuals do make investment decisions at regular intervals. These financial decisions that they make depend to a greater extent on the present value of the cash flows. For instance, if an individual wants to have a certain amount of money in his account after some period of time basically to use for future investment then through the knowledge of present value he/she will be in a position to compute the amount of money that should be invested today so that the future amount becomes realisable. In this case, the knowledge of present value facilitates the undertaking of the various investment projects that an entity, individuals or organizations would wish to undertake in future.
In addition to the importance of present value highlighted above, it is also of crucial help to financial managers in making capital budgeting decisions. This may involve choosing between mutually exclusive investment projects, projects where capital rationing is involved, substitute projects, complementary projects and also projects with different lives. The capital budgeting decision is usually arrived at by using various discounting techniques most of which employ the concept of present value.
Therefore, it is clear that in the field of corporate finance, present value concept is very vital hence its continuous application as it provides green light to mangers and students of finance in understanding the course of corporate finance and also in making prudent investment decisions.
Question 2
a) Future Value= (PVIFr%, n) ×p = (PVIF5%, 7) ×500
= 500(1+0.05)7
= 500(1.41)
= $ 703.55
b) Future Value= (PVIFr%, n) ×p = (PVIF4%, 3) ×950
= 950(1+0.04)³
= 900× (1.12)
= $ 1,068.62
c) Future Value= (PVIFr%, n) ×p = (PVIF2%, 7) ×9900
= 9900(1+0.02)7
= 9900×1.15
...
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