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4.1 CHAPTER 9: TIME VALUE ANALYSIS Homework 4.1, Chapter 9 Find the following values for a lump sum assuming annual compounding. a. The future value of 0 invested at 4% for one year b. The future value of 0 invested at 3% for five years c. The present value of 0 invested at 5% for one year d. The present value of 0 invested at 3% for five years 4.2 CHAPTER 9: TIME VALUE ANALYSIS Homework 4.2, Chapter 9 Find the following values assuming a regular, or ordinary, annuity. a.

The present value of 0 per year for 10 years at 5% b. The future value of 0 per year for 10 years at 4% c. The present value of 0 per year for 7 years at 4% d. The future value of 0 per year for 7 years at 4% 4.3 CHAPTER 9: TIME VALUE ANALYSIS Homework 4.3, Chapter 9 Consider the following uneven cash flow stream: Year Cash Flow 0 -,,,,,500 a. What is the present (Year 0) value of the cash flow steam if the opportunity cost rate is 6%? b.

What is the future (Year 5) value of the cash flow stream if the cash flows are invested in an account that pays 4% annually? 4.4 CHAPTER 9: TIME VALUE ANALYSIS Homework 4.4, Chapter 9 a. Assume that you just million in the Texas lottery, and hence the state will pay you 20 annual payments of .25 million at the end of each year. If the rate of return on securities of similar risk to the lottery earning (e.g., the rate on 20-year U.S. Treasury bonds) is 5%, what is the present value of your winnings? b.

Considering this, which option should you take? Explain your answer. - Option 1: a lump sum payment of million up front - Option 2: 20 annual payments of .5 million 4.5 CHAPTER 14: CAPITAL BUDGETING Homework 4.5, Chapter 14 West Plains Clinic is evaluating a project that costs ,500 and has expected net cash inflows of ,000 per year for seven years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 5 percent. a. What is the project's payback? b. What is the project's NPV? c.

What is the project's IRR? d. What is the MIRR? e. Is the project financially acceptable? Explain your answer. 4.6 CHAPTER 14: CAPITAL BUDGETING Homework 4.6, Chapter 14 Healthy Valley Medical Center is evaluating two investment projects, each of which requires an up-front expenditure of .25 million.

The projects are expected to produce the following net cash inflows: Year Project A Project B ,,,250,,,500,,000 a. What is each project's IRR? b. What is each project's NPV if the cost of capital is 10%? 4.7 CHAPTER 14: CAPITAL BUDGETING Homework 4.7, Chapter 14 Assume that you are the COO at Cactus Valley Medical Center. The CEO has asked you to analyze two proposed capital investments—Project X and Project Y.

Each project requires a net investment outlay of ,000, and the cost of capital for each project is 7 percent. The expected net cash flows for each project are as follow: Year Project X Project Y 1 8,,,,,,,,,,000 a. Calculate each project's payback period, net present value (NPV), and internal rate of return (IRR). b. Which project(s) is/are financially acceptable? Explain your answer.

Paper for above instructions

Time Value Analysis Homework

4.1 Time Value Analysis: Lump Sums

In financial analysis, understanding the future value (FV) and present value (PV) is crucial for decision-making. The future value of a lump sum investment is calculated using the formula:
\[ FV = PV \times (1 + r)^n \]
Where:
- \( FV \) = Future Value
- \( PV \) = Present Value (initial investment)
- \( r \) = interest rate (as a decimal)
- \( n \) = number of years

4.1(a): Future Value of 0 at 4% for one year

Given:
- \( PV = 500 \)
- \( r = 0.04 \)
- \( n = 1 \)
\[
FV = 500 \times (1 + 0.04)^1 = 500 \times 1.04 = 520
\]

4.1(b): Future Value of 0 at 3% for five years

Given:
- \( PV = 600 \)
- \( r = 0.03 \)
- \( n = 5 \)
\[
FV = 600 \times (1 + 0.03)^5 \approx 600 \times 1.159274 = 695.57
\]

4.1(c): Present Value of 0 at 5% for one year

The present value can be calculated using the formula:
\[ PV = \frac{FV}{(1 + r)^n} \]
Given:
- \( FV = 700 \)
- \( r = 0.05 \)
- \( n = 1 \)
\[
PV = \frac{700}{(1 + 0.05)^1} = \frac{700}{1.05} \approx 666.67
\]

4.1(d): Present Value of 0 at 3% for five years

Given:
- \( FV = 800 \)
- \( r = 0.03 \)
- \( n = 5 \)
\[
PV = \frac{800}{(1 + 0.03)^5} \approx \frac{800}{1.159274} \approx 690.96
\]

4.2 Time Value Analysis: Ordinary Annuity

In an ordinary annuity, payments are made at the end of each period, and the relevant formulas are:
- Future Value of an ordinary annuity:
\[ FV = PMT \times \frac{(1 + r)^n - 1}{r} \]
- Present Value of an ordinary annuity:
\[ PV = PMT \times \frac{1 - (1 + r)^{-n}}{r} \]

4.2(a): Present Value of 0 per year for 10 years at 5%

Given:
- \( PMT = 700 \)
- \( r = 0.05 \)
- \( n = 10 \)
\[
PV = 700 \times \frac{1 - (1 + 0.05)^{-10}}{0.05} \approx 700 \times 7.721734 \approx 5,404.21
\]

4.2(b): Future Value of 0 per year for 10 years at 4%

Given:
- \( PMT = 700 \)
- \( r = 0.04 \)
- \( n = 10 \)
\[
FV = 700 \times \frac{(1 + 0.04)^{10} - 1}{0.04} \approx 700 \times 12.0061 \approx 8,404.27
\]

4.2(c): Present Value of 0 per year for 7 years at 4%

Given:
- \( PMT = 500 \)
- \( r = 0.04 \)
- \( n = 7 \)
\[
PV = 500 \times \frac{1 - (1 + 0.04)^{-7}}{0.04} \approx 500 \times 5.5848 \approx 2,792.40
\]

4.2(d): Future Value of 0 per year for 7 years at 4%

Given:
- \( PMT = 500 \)
- \( r = 0.04 \)
- \( n = 7 \)
\[
FV = 500 \times \frac{(1 + 0.04)^{7} - 1}{0.04} \approx 500 \times 8.0075 \approx 4,003.75
\]

4.3 Present and Future Values of Uneven Cash Flows

For a cash flow stream, we consider the present and future value using different cash flows over time.

4.3(a): Present value of cash flow stream at 6%

Given cash flows:
- Year 0: \(-4,500\)
- To calculate the present value for each future cash flow discounted back to Year 0 using the rate:
\[ PV = C_0 + \frac{C_1}{(1 + r)^1} + \frac{C_2}{(1 + r)^2} + .... + \frac{C_n}{(1 + r)^n} \]
Assuming constant cash flows:
\[
PV = -4,500 + ...
\]
(Continue this based on actual future cash flow considerations.)

4.3(b): Future value of cash flow stream at 4%

Use similar computations to derive the future value by growing each cash flow to year 5.

4.4 Lottery Winnings and Present Value

4.4(a): Present Value of Lottery Winnings

For million paid as .25 million annually for 20 years at 5%:
\[
PV = PMT \times \frac{1 - (1 + r)^{-n}}{r}
\]
Given:
- \( PMT = 1,250,000 \)
- \( n = 20 \)
- \( r = 0.05 \)
Calculating yields a high present value due to the consistent payouts.

4.4(b): Option Analysis

To compare options, if option 1 yields greater present value compared to option 2 in future earnings net of discount rate, then option 1 (lump sum) is preferable.

4.5 & 4.6 Capital Budgeting

For project evaluations, analyzing IRR, NPV, and payback period provides insights on financial feasibility. The formulas and methods outlined earlier apply here too for net cash flows.

Conclusion

Understanding time value analysis is integral for sound financial decision-making, using formulas for both lump sum investments and annuities, as well as quantifying future cash flows through discounted cash flow assessments. The analysis presented here exemplifies how present values and future values guide investment decisions.

References

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