Financial Markets and Corporate Strategy (assignment template) – 1 of 2
Insights/Instructions: Use this template to complete the assignment. Please do not delete these insights/instructions or inquiries provided herein; rather, save the template, type your response below then, after saving your work, upload the document to the assignment’s drop-box provided in Moodle.
1. Time Value of Money. Access the online Corporate Finance resource and read the section on Time Value of Money (pages 33 thru 69). (File is located in your Moodle Shell)
The “Time Value of Money” chapter offered several concepts and practical examples. Which concept and example did you find most interesting? Explain/elaborate.
Manhattan Island (an example offered within the chapter):
Explain how $24 invested in a savings account offering a compound interest rate, r, of 8% in 1626, would have been worth $75.979 trillion in the year 2000 (374 years).
Explain how $24 invested in a savings account offering a compound interest rate, r, of 3.5% in 1626, would have been worth $9,287,569 (or approximately 9.3 million) in the year 2000.
What accounts for the significant difference in the value of the account in the year 2000?
* Present Values. Compute the present value of a $100 cash flow for the following combinations of discount rates and times. Include the formula used to make the calculations. Note: See page 50 and 51 of the online resource; the general formula is:
r = 12%; t = 10 years
r = 12%; t = 20 years
r = 7 percent; t = 10 years
r = 7 percent; t = 20 years
* Present Values. Would you rather receive $1,000 a year for 10 years or $800 a year for 15 years if:
The interest rate is 7 percent?
The interest rate is 22 percent?
Provide a rational as to why do your answers to “(a)” and “(b”) differ?
* Future Values. Compute the future value of a $100 cash flow for the following combinations of discount rates and times. Include the formula used to make the calculations. The general formula is:
r = 12%; t = 10 years
r = 12%; t = 20 years
r = 7 percent; t = 10 years
r = 7 percent; t = 20 years
* Calculating Interest Rate. Showing/explaining all of your work, find the interest rate implied by the following combinations of present and future values:
Show your work:
Future Value = Present Value * (1 + r)t
Show your work:
Scenario
Years
Present Value
Future Value
A
10
$400
$684
B
3
$187
$249
C
6
$260
$300