TIME VALUE OF MONEY (ANSWERS)

4.) (I Used the Present Value and Future Value Tables; with 4 decimal places)

A. $4,000 x 1.4693= $5,877.20

-Within 5 years, my investment will grow from $4,000 to $5,877.20

B. $5,000/1.9487= $2,565.81

-The value today of my friend’s future gift would be $2,565.81

C. $1,200 X 4.3746= $5,249.52

D. $5,000 X 11.4359= $57,179.50

5.)

A. The cash flows do not occur at the same points in time, and such an analysis disregards the time value
of money. Dollars received in earlier years are worth more than dollars received in the future.

B. The cash flows should be discounted, and the option with the highest present value should be
selected. Such a process integrates the time value of money into the decision process.

C. The revision should be preferred. Both options involved the same total dollars; however, because
significant inflows occur sooner with the revision, this option would have a higher present value.

D. An annuity is a series of uniform cash inflows or outflows over a period of years. Option no. 2 involves
an annuity.

6.) The time value of money and present value are important business concepts.

Time value of money and present value are important business concepts as this explains
how important your money today compared to the future. The value of the money you have
now is not the same as it will be in the future . Also, it states that a sum of money held today is
more valuable than a future payment. This money concept is true because money held today
can be invested to earn a rate of return. The time value of money is also referred to as the net
present value of money. It is a beneficial concept that enables you to understand what money
is worth in terms of time. It consists of a formula that is typically used by investors to gain more
insight into the value of money in relation to its future worth. The importance of time value of
money is based on determining how time affects the value of money. It basically refers to the
principle of money being worth more currently than it will be in the future since the money you
have at the moment has the potential to increase. This is mainly attributed to inflation.