The time value of money theory, a fundamental financial concept, states that a dollar received today is worth more than a dollar received tomorrow because today’s dollar can be invested and earn a return.
After reviewing your study material on this concept provide a short concise response to each of the following questions.
Question 1 - Why is the time value of money concept so important to the measurement of financial value? Specifically explain or illustrate how this critical concept is used to aid in measuring financial value.
Question 2 – There is an inherent opportunity cost contained in every time value of money calculation. What is this opportunity cost and where is it represented in the Present Value equation? Provide a illustrated example.
Question 3 - In your own words describe the fundamental relationship that exists between the Present Value Equation (PV) and The Future Value Equation (FV) and then illustrate this relationship using the PV and FV formula.
Annuity with non- annual payments
1. The basic annuity valuation equation can handle situations in which there is compounding more frequently than once a year. In a one paragraph posting, describe how you would translate the key variables of a 8% APR annuity with $1,000 annual payments at the end of each year for 4 years to convert it for semiannual compounding in the annuity formula.
Be sure to show your final formula input variables after adjustment for semiannual compounding.
2. Would the future value on an annuity increase or decrease with increasing compounding as you go from semiannual to quarterly to monthly? Explain Why?
This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.1. Answer:
The time value of money is important since money has opportunity cost associated with it. As an example, if an individual has $1 today, this amount can be invested at the prevailing interest rate and the value would be more than $1 after 1 year. If the interest rate is 10% for example, the value of $1 today would be $1 * (1 + 10%) = $1.10 after 1 year. The interest rate is always more than 0 and this creates opportunity cost in terms of interest accrued on the present value. As such, to measure the financial value, it is important to estimate the cash flows along with their timing so that the present value of the cash flows can be found and appropriate financial decisions can be taken. When the Net present value (NPV) of projects are computed, all the expected cash flows are determined and their present value is obtained by discounting using the...