Question

• Write a 200- to 300-word description of the four time value of money concepts: present value, present value of an annuity, future value, and future value of annuity. Describe the characteristics of each concept and provide an example of when each would be used.

Answer 1

Your text materials are the best source of this information.

Answer 2

DESCRIPTION OE THE FOUR TIME VALUE OF MONEY CONCEPTS

Present value is the value of a cash flow today.
Usage when a single cash flow is to be discounted to today’s value.
Formula PV = FV / ((1+i) ^n))
Where, PV = Present value
FV = Future Value
i= interest rate per compounding period
n=period
PVIF = Present Value Interest Factor = (1/ ((1+i) ^n))
Example Mr A would receive $1,100 from Mr B after 1 year. Find the present value of the cash flow if Mr A’s interest rate is 10% p.a.
PV = 1100 / (1.1^1) = $1,000
Thus, the present value of cash flow to be received after 1 year is $1,000 today.

Present value of annuity is the value of a series of equal cash flow received in equidistant period, today.
Usage when a series of cash flow is to be discounted to today’s value.
Formula PV = (a/i) (1-(1/ ((1+i) ^n)))
Where, PV = Present value
a = equal cash flow (annuity)
i= interest rate per compounding period
n=no. of annuities
PVIFA = Present Value interest factor of annuity = (1/i) (1-(1/ ((1+i) ^n)))
If cash flow occurs at the beginning of period then the above formula is to be multiplied by (1+i)
Example Mr A would receive $1,000 from Mr B every year for 5 years. Find the present value of the cash flow if Mr A’s interest rate is 10% p.a.
PV = (1000/.1)(1-(1/((1.1^5))) = $3,791
Thus, the present value of cash flow to be received every year for 5 years is $3,791 today.

Future value is the value of a cash flow in future.
Usage when value of a single cash flow is to be computed in future’s date.
Formula FV = PV ((1+i) ^n))
Where, PV = Present value
FV = Future Value
i= interest rate per compounding period
n=period
FVIF = Future Value Interest Factor = ((1+i) ^n))
Example Mr A would receive $1,000 from Mr B today. Find the future value of the cash flow if Mr A’s interest rate is 10% p.a.
FV = 1000 * (1.1^1) = $1,100
Thus, the future value of cash flow after 1 year is $1,100.

Future value of annuity is the value of a series of equal cash flow received in equidistant period, on a future date.
Usage when future value is to be computed for a series of cash flow.
Formula FV = (a/i) (((1+i) ^n)-1)
Where, FV = Future value
a = equal cash flow (annuity)
i= interest rate per compounding period
n=no. of annuities
FVIFA = Present Value interest factor of annuity = (1/i) (((1+i) ^n)-1)))
If cash flow occurs at the beginning of period then the above formula is to be multiplied by (1+i)
Example Mr A would receive $1,000 from Mr B every year for 5 years. Find the future value of the cash flow if Mr A’s interest rate is 10% p.a.
FV = (1000/.1) ((1.1^5)-1)) = $6,105
Thus, the future value of cash flow to be received every year for 5 years is $6,105.

Answer 3

Solve, using the Rule of 72: rate =6%, pv=$7,000, fv= $56,000. Solve for years.