Can you please intrepret the findings below and incorporate your findings with t
ID: 2731153 • Letter: C
Question
Can you please intrepret the findings below and incorporate your findings with the data provided? Interpret the results from the computations and explain how the information is useful. Write a four or five paragraph memo to the CEO.
1. PV of 100,000 to be received after 5 years and having rate of 5% PV = FV/(1+r)^n = 100,000/(1.05)^5 = 78,352.62 2. PV of 200,000 to be received after 10 years and having rate of 10% PV = FV/(1+r)^n = 200,000/(1.10)^10 = 77,108.66 3. FV = PV*(1+r)^n PV = 100,000 r = 5% n= 5 years FV = 100,000*(1+0.05)^5 = 127,628.2 4. PV = 200,000 r = 10% n= 10 years FV = 200,000*(1.10)^10 = 518,748.50 5. Ordinary annuities are payments made at the end of the year. Annuity is stream of constant cash flows. Formula and calculations shown in the table below: Year Amount Formula PV 1 100,000.00 annuity/(1+r) 95,238.10 2 100,000.00 annuity/(1+r)^2 90,702.95 3 100,000.00 annuity/(1+r)^3 86,383.76 4 100,000.00 annuity/(1+r)^4 82,270.25 5 100,000.00 annuity/(1+r)^5 78,352.62 Total PV 432,947.68 6. Ordinary annuities. Formula and calculations are shown in the table below: Year Amount Formula PV r 1 200,000.00 annuity/(1+r) 181,818.18 0.1 2 200,000.00 annuity/(1+r)^2 165,289.26 0.1 3 200,000.00 annuity/(1+r)^3 150,262.96 0.1 4 200,000.00 annuity/(1+r)^4 136,602.69 0.1 5 200,000.00 annuity/(1+r)^5 124,184.26 0.1 6 200,000.00 annuity/(1+r)^6 112,894.79 0.1 7 200,000.00 annuity/(1+r)^7 102,631.62 0.1 8 200,000.00 annuity/(1+r)^8 93,301.48 0.1 9 200,000.00 annuity/(1+r)^9 84,819.52 0.1 10 200,000.00 annuity/(1+r)^10 77,108.66 0.1 Total PV 1,228,913.42 7. Future value of an annuity = A(1+r)n-1+A(1+r)n-2.......... +A = A*[(1+r)^n-1]/r A = 100,000 n = 5 r = 0.05 Future value = 100,000*[(1.05)^5-1]/0.05 = 100,000*5.525631 = 552,563.1 8. A = 200,000 n = 10 r = 0.10 FV = 200,000*[(1.10)^10-1]/0.10 = 200,000*15.937425 = 3,187,484.92 9. Perpetuities are annuities of infinite duration. PV = Amount/r = 100,000/0.05 = 2,000,000 10. PV = Amount/r = 200,000/0.10 = 2,000,000Explanation / Answer
Answer : Time Value of Money : Time Value of Money means value of money to be received in futures is less than the value of money on hand today, If the Value is same. It is due to money on hand can be invested and generate the more money.
1) As in given example 1, If we will receive $ 1,00,000 after 5 years and interest rate is 5%. its present value is $ 78,352.62. It means that If we have $ 78352.62 and invest it on 5%, After 5 year we will receive $ 1,00,000. We can say $ 78352.62 with interest of 5% is equal to $ 100000.
2) As in given example 2, If we will receive $ 2,00,000 after 10 years and interest rate is 10%. its present value is $ 77,108.66. It means that If we have $ 77108.66 and invest it on 10%, After 10 year we will receive $ 2,00,000. We can say $ 77108.66 with interest of 10% is equal to $ 200000.
3) Example 3 well explained the concept of Time Value of Money. This example clearly shown that If we invested $ 100000 @ 5% interest for 5 Years. We will receive $ 127628.20. The Time value of money will be $ 27628.20.
4) Example 4 well explained the concept of Time Value of Money. This example clearly shown that If we invested $ 200000 @ 10% interest for 10 Years. We will receive $ 518748.50. The Time value of money will be $ 318748.50.
It means $ 200000 dollar with interest of 10% will be equal to $ 518748.50 after 10 years.
Hoped you will undestand the concept of time value of money clearly.