The purpose of this paper is to larn about time-value-of-money to do optimum determinations as trough must understand the relationship between a dollars present today and a dollar in the hereafter. Time value of money Today’s fiscal directors frequently have to compare hard currency payments that occur on different day of the months. To do optimum determinations. the director must understand the relationship between a dollar today [ present value ] and a dollar in the hereafter [ future value ] . The clip value of money is fundamentally a measuring or position of an investing you might do while still sing its hereafter lessening in value due to rising prices.
The clip value of money allows us to understand what that rising prices or lessening may go in the hereafter or present. Most significantly. the clip value of money construct allows us to make up one’s mind whether it would be good puting a amount of money into investing where it collects value from involvement. or whether that same sum of money would be most valuable in the present due to rising prices rates. Understanding the construct of clip value of money It is really of import for directors to understand the construct of clip value of money because it reminds them that any sum of money is worth more when it is.
STRATEGIC CORPORATE FINANCE received sooner instead than subsequently. Therefore. certain determinations need to be made based on the company’s demands and capablenesss. Directors have to maintain in head that a peculiar sum of money considered today has a different purchasing power than that same sum of money would hold in the hereafter. The value of that money alterations due to two factors: earned involvement and rising prices ( Study finance. 2013. Par. 1 ) . These are both considered when organisations make determinations refering the clip value of money.
Prior to doing determinations. measurings must be made including finding the hereafter value and the present value of that same sum of money. Directors measure the hereafter value by multiplying the rule sum by the involvement rate and so adding the involvement which was gained to the rule sum. This gives them the basic thought of what that same sum of money will be deserving in the hereafter. Directors can so make up one’s mind whether the added involvement or rising prices is big plenty to utilize the money short-run or long-run.
3 ) Calculate the future value of the followerss: ? a. $ 120. 537. 19 if invested for three old ages at a 3 % involvement rate? B. $ 337. 891. 22 if invested for seven old ages at a 6 % involvement rate? c. $ 420. 891. 12 if invested for 11 old ages at an 12 % involvement rate d. $ 525. 520. 22 if invested for 14 old ages with a 15 % involvement rate? Used Table 1 The undermentioned computations were performed harmonizing to beginnings obtained from Jcconney ( 2013 ) . STRATEGIC CORPORATE FINANCE b. c. 4 ) Calculate the present value of the followerss: ? a. $ 262. 126.
17 to be received six old ages from now with a 4 % involvement rate? B. $ 325. 003. 21 to be received eight old ages from now with a 7 % involvement rate? c. $ 421. 567. 35 to received ten old ages from now with an 10 % involvement rate? d. $ 631. 500. 05 to be received 12 old ages from now with a 13 % involvement rate? Used Table 1 The undermentioned computations were performed harmonizing to beginnings obtained from Jcconey ( 2013 ) . a. b. c. d. STRATEGIC CORPORATE FINANCE 5 ) Suppose you are to have a watercourse of one-year payments ( besides called an “annuity” ) of $ 525. 891.
12 every twelvemonth for seven old ages get downing at the terminal of this twelvemonth. The involvement rate is 15 % . What is the present value of these seven payments? ? Please usage Table 3 The followers was calculated utilizing resources from J Cooney ( 2013 ) . 6 ) Suppose you are to have a payment of $ 637. 891. 24 at the terminal of each twelvemonth for six old ages. You are lodging these payments in a bank history that pays 12 % involvement. Given these six payments and this involvement rate. how much will be in your bank history in six old ages? The followers was calculated utilizing resources from Table 2 Ordinary Annuity.
Study finance ( 2013 ) . 637. 891. 24 ten 8. 1152 = 5. 176. 614. 99 Learning aims mastered This instance assignment faculty 2 has allowed me to understand money and the value of money. Additionally. it besides allowed me to understand how outside factors such as rising prices can do a big difference in the fiscal determination procedure. Prior to this instance. I was non familiar with the present and future value computations. I found this faculty to be rather ambitious and honoring at the same clip as I realized the manner in which money can.