Tutorial Week 5

1. 1: Time Value of Money: Introduction A dollar in hand today is worth -Select- ✓a dollar to be received in the future because if you had it now you could invest that dollar and Select- interest. Of all the techniques used in finance, none is more important than the concept of time value of money (TVM), also called -Select- analysis. Time value analysis has many applications including retirement planning, stock and bond valuation, loan amortization and capital budgeting analysis. Time value of money uses the concept of compound interest rather than simple interest.

Fundamentals of Engineering Economy  Consider the cash flow transactions depicted in the accompanying cash flowdiagram, with the changing interest rates specified. What is the equivalent presentworth?

4. Present value Finding a present value is the reverse of finding a future value. Which of the following is true about finding the present value of cash flows? O Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return. O Finding the present value of cash flows tells you what a cash flow will be worth in future years at a specified rate of return. Which of the following investments that pay will $5,000 in 12 years will have a higher price today? O The security that earns an interest rate of 8.25%. O The security that earns an interest rate of 5.50%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 13.80%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price? O An investment…

2. Present value Aa Aa Finding a present value is the reverse of finding a future value. Which of the following is true about finding the present value of cash flows? O Finding the present value of cash flows tells you what a cash flow will be worth in future years at a specified rate of return. O Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return. Which of the following investments that pay will $13,500 in 13 years will have a higher price today? The security that earns an interest rate of 7.00%. The security that earns an interest rate of 10.50%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 12.40%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price? O An investment…

3. Present value Finding a present value is the reverse of finding a future value. Which of the following is true about finding the present value of cash flows? Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return.   Finding the present value of cash flows tells you what a cash flow will be worth in future years at a specified rate of return.     Which of the following investments that pay will $18,500 in 8 years will have a higher price today? The security that earns an interest rate of 8.50%.   The security that earns an interest rate of 12.75%.     Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 13.80%. Assuming that both investments have equal risk and Eric’s investment time horizon is flexible, which of the following investment options will…

3. Future value The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered applications involves the calculation of a future value. The process for converting present values into future values is called four time-value-of-money variables. Which of the following is not one of these variables? The trend between the present and future values of an investment The duration of the deposit (N) The interest rate (t) that could be earned by deposited funds The present value (PV) of the amount deposited This process requires knowledge of the values of three of 4

Finance   The time value of money refers to: a) Factors that show future value b) Factors that show past value c) Concept that a dollar received today is worth more than a dollar received in the future d) Concept that a dollar received today is worth less than a dollar received in the future   explain in detail

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2. Future value The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered applications involves the calculation of a future value. The process for converting present values into future values is called    . This process requires knowledge of the values of three of four time-value-of-money variables. Which of the following is not one of these variables? The interest rate (I) that could be earned by deposited funds   The trend between the present and future values of an investment   The duration of the deposit (N)   The present value (PV) of the amount deposited     All other things being equal, the numerical difference between a present and a future value corresponds to the amount of interest earned during the deposit or investment period. Each line on the following graph corresponds to an interest rate: 0%, 9%, or 17%. Identify the interest rate that corresponds…

Question content area top Part 1 ​(Present value of complex cash​ flows)  You have an opportunity to make an investment that will pay ​$300 at the end of the first​ year, ​$100 at the end of the second​ year, ​$500 at the end of the third​ year, ​$300 at the end of the fourth​ year, and $400 at the end of the fifth year.   a.  Find the present value if the interest rate is 12 percent. ​ (Hint: You can simply bring each cash flow back to the present and then add them up. Another way to work this problem is to either use the =NPV function in Excel or to use your CF key on a financial calculator—but ​you'll want to check your​ calculator's manual before you use this key. Keep in mind that with the =NPV function in​ Excel, there is no initial outlay. That​ is, all this function does is bring all the future cash flows back to the present. With a financial​ calculator, you should keep in mind that CF0 is the initial outlay or cash flow at time​ 0, and, because there is no cash flow at time​…

Finding a present value is the reverse of finding a future value. Which of the following is true about finding the present value of cash flows? O Finding the present value of cash flows tells you what a cash flow will be worth in future years at a specified rate of return. O Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return. Which of the following investments that pay will $15,500 in 8 years will have a lower price today? O The security that earns an interest rate of 5.50%. O The security that earns an interest rate of 8.25%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 6.80%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price? O An investment that matures in six…

Tools S 11. Problem 4-10 (Present and Future Values of Single Cash Flows for Different Interest Rates) Present and Future Values of Single Cash Flows for Different Interest Rates Use both the TVM equations and a financial calculator to find the following values. (Hint: If you are using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can "override" the variable that changes by simply entering a new value for it and then pressing the key for the unknown variable to obtain the second answer. This procedure can be used in parts b and d, and in many other situations, to see how changes in input variables affect the output variable.) Do not round intermediate calculations. Round your answers to the nearest cent. a. An initial $700 compounded for 10 years at 8%. eBook $ b. An initial $700 compounded for 10 years at 16%. $ ▸ c. The present value of $700 due in 10 years at an 8%…

Solve both of these practice problems

estion 6 Assume that you are considering an investment costing $10,000, for which the future cash flows from owning the security depend on the state of the economy. Given the below table data, the Expected cash flow is;   State of Economy Probability Cashflows Recession 0.4 800 Moderate Growth 0.3 1200 Strong Growth 0.3 1600

question 13

Which of the following represents the time value of money concept? a) Money today is worth more than the same amount in the future b) Money in the future is worth more than the same amount today c) Money's value does not change over time d) Money is only valuable when invested in stocks

QUESTION 13 For a given cash flow diagram, if the interest rate i=10%, and A=$600, the F value is closest to: F=? A Years 2 3 i=10 % P=$ 4000

The concept of time value of money is that* •The cash flows that occur earlier are more valuable than cash flows that occur later •The cash flows that occur earlier are less valuable than cash flows that occur later •The longer the time cash flows are invested, the more valuable they are in the future •The future value of cash flows are always higher than the present value of the cash flows

The present value represents the amount of money you would have to deposit today in order to match what you would get from the income stream at the future date. The formula is Time = M = i Future value represents the total amount of money you would have if you deposit the income stream until a future date. The formula is To start our problem we need to identify the variables. Rate =r= i Income Stream S(t) = i Present Value = years % M 1. 0 S (t) et dt. Future Value = Present Value* erM dollars/year

Match the terms to the description Time Value of Money (TVM) Discounting Present Value (PV) Future Value (FV) Cash Flow (CF) ✓ [Choose ] value of money at some later time funds in a secure investment will increase to an equivalent future amount the potential lost benefit when choosing one alternative over another transferring money into our out of an account calculating the present value of future cash flow stream value of money right now [Choose ] [Choose ] [Choose ]

4. Future value of annuities There are two categories of cash flows: single cash flows, referred to as "lump sums," and annuities. Based on your understanding of annuities, answer the following questions. Which of the following statements about annuities are true? Check all that apply Ordinary annuities make fixed payments at the beginning of each period for a certain time period. An annuity due is an annuity that makes a payment at the beginning of each period for a certain time period. An annuity due earns more interest than an ordinary annuity of equal time. An annuity is a series of equal payments made at fixed intervals for a specified number of periods Which of the following is an example of an annuity? 0 A job contract that pays a regular monthly salary for three years O A job contract that pays an hourly wage based on the work done on a particular day Katie had a high monthly food bill before she decided to cook at home every day in order to reduce her expenses. She starts to…