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Chapter 4: Q8DQ. (page 279)

List five different financial applications of the time value of money.

Short Answer

Expert verified

The applications of the time value of money may involve loan valuation, bonds valuation, capital budgeting decisions, investment analysis, and personal finance analysis.

Step by step solution

01

Meaning of time value of money

Time value of money is a concept that states that the money available today is worth more than the same amount of money available at any time in the future.

02

Applications of the time value of money

The financial applications of the time value of money are as follows:

  1. Time value of money is used for loan valuation in terms of computing the total amount payable in the future and its net cost to the borrower.
  2. It is also used to compute the present worth of a bond or other investment avenue in order to make the investment decision.
  3. This concept is used while making capital budgeting decisions in terms of evaluating the true returns associated with relevant projects.
  4. The time value of money is used to compute the returns to be provided by various investment avenues available to investors.
  5. It is also used while making the decisions on personal finance by computing the total cost associated with each option and thereby making the appropriate decisions.

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Most popular questions from this chapter

Question: Phil Goode will receive $175,000 in 50 years. His friends are very jealous of him. If the funds are discounted back at a rate of 14 percent, what is the present value of his future 鈥減ot of gold鈥�?

What approaches can be taken in valuing a firm鈥檚 stock when there is no cash dividend payment?

Home Security Systems is analyzing the purchase of manufacturing equipment that will cost \(50,000. The annual cash inflows for the next three years will be:

Year

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1

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2

23,000

3

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a. Determine the internal rate of return.

b. With a cost of capital of 18 percent, should the machine be purchased?

Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of \(2.50 per share, and the current price of its common stock is \)50 per share. The expected growth rate is 8 percent.

a. Compute the cost of retained earnings (Ke). Use Formula 11-5.

b. If a $3 flotation cost is involved, compute the cost of new common stock (Kn). Use Formula 11-6.

Question: As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find the present value of an annuity due, the annuity formula must be adjusted as to the following: PVAD 5 A 3 ( 12 1 ________ (11i) n 21 ___________ i 11) The Capital Budgeting Process blo7716x_ch09_255-294.indd 284. Likewise, the formula for the future value of an annuity due requires a modification: FVAD 5 A 3 ( (11i) n11 21 ___________ i 21). What is the future value of a 15-year annuity of $1,800 per period where payments come at the beginning of each period? The interest rate is 12 percent.

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