Please SHOW ALL WORK 1. Why is it necessary to know about time value of money co

Question

Please SHOW ALL WORK

1. Why is it necessary to know about time value of money concepts? Why can't you just make judgments about future cash flows based purely on the size of the cash flows?

2. Define Future Value.

3. Define Present Value.

4. What are annuities?

5. (calculating future value) You buy an 8 year, 7% CD for $1,000. Interest is compounded annually. How much is it worth at maturity?

6. (calculating present value) What's the present value of $10,000 to be received in 6 years? (Your required rate of return is 10% a year.)

7. (calculating the rate of return) A friend promises to pay you $500 three years from now if you loan him $400 today. What interest rate is your friend offering you?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part 5:

Future Value = Principial*(1+r)^n

Principal = 1000

r = 7%

n = 8

Future Value = 1000*(1+7%)^8 = 1718.19 or 1718

Answer is 1718.

Part 6:

Present Value = Amount to be Received at Year 6/(1+r)^n

r = 10%

n = 6 Years

Present Value = 10000/(1+10%)^6 = 5644.74 or 5645

Answer is 5645.

Thanks.

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