Assignment #1-Due 09/11/2018 1. Explain the Time Value of Money 2. Assume simple

Question

Assignment #1-Due 09/11/2018 1. Explain the Time Value of Money 2. Assume simple interest for the following A-$2000 deposited in an account paying 7.5% annual interest rate for Find the Future value of the funds years. B $10,000 deposited in an account pa rate for an additional 3 years. What is the value of the funds at the end of the investment. deposited in an account paying 8% annual interest rate for 3 years and 10% annual interest D-$2,500 earning 5% annually has grown to $3.500. Find how long did the funds take to grow (find t). 3. Assume compounding interest for the following and use excel TVM functions $10,000 deposited in an account earning 5% interest for a period of 4 years. Find the future value of the funds using Annual Compounding Find the future value of the funds using Quarterly Compounding i. iii. Find the future value of the funds using Monthly Compounding. iv. Find the future value of the funds using Daily Compounding B- $5,000 grows to $5,500 at the end of two years. Interest compounds annually. Find the annual interest rate. C-S7,000 earns 8% per year compounded annually and grows to $10,860 at the end of the investment period. Find time (NPER). D-An investment has grown to $15,000 over 9 years. The annual interest rate earned was 8% compounded annually, Find the PV (initial value invested). *Round all answers to two decimals.

Explanation / Answer

1) The time value of money concept "dollar received today is worth more than a dollar received at some time in the future." So, it is better to have money now rather than later. The worth more means the value of money will be more now rather in future because of inflation and buying capacity.The present value of an investment is inversely related to both time and the interest rate.The interest rate or discount rate is the opportunity cost of capital.The longer the duration of investment the higher the discount rate and the lower the present value of Investment.The longer the individual wait for the cash flow to occur and greater the discount rate and it must take into account foregone opportunities.

2)

2) a) Principal $2,000.00 Rate 7.50% Period 5 years Future Value = P + (P x R x T) Future Value = $2000 + (2000 x 7.5% x 5) $2,750.00 b) Principal $10,000.00 Rate 8.00% Period 3 years Future Value = P + (P x R x T) Future Value = $10,000 + (10000 x 8% x 3) + (10000 x 10% X 3) $15,400.00 D) Future Value $3,500.00 Principal $2,500.00 Interest ($3500 - $2500) $1,000.00 Rate = 5.00% Period = Interest/P x R Period = $1000/$2500 x 5% 8.00 Years

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