Strategic Corporate Finance - Essay Example

An investor must be paid some price for this sacrifice (Brigham & Weston, 2009). So the future value of the dollar-assuming a positive rate of interest-will always be higher than its present value. Another reason for interest being charged on capital is that capital is one of the factors of production that can give access to men, materials and machinery, help automate and speed up processes and productivity in a short time and this is why the demand for capital attracts a price called the interest rate (Rao, 2011).

Why is it Important for Financial Managers to Understand the Concept of Time Value of Money? Finance is the lifeblood of business and industry. Everything from running the day to day operations of an enterprise to meeting financial needs for future plans requires money. In fact investing surplus funds to get the best possible returns as well as keeping sufficient liquidity in the asset and liability mix is a key function of financial managers. They look at both present and future plans of the business and consider how to achieve these in the light of financial requirements (Crosson & Needles, 2008).

This is why an understanding of the time value of money is of key importance to financial managers. They can match the funding and investment portfolios of the enterprise to get the best returns (Mathur, 1979). Calculations of the Future Value: a. $54,298 if invested for five years at a 7% interest rate FV= PV (1 + r)t FV= 52948(1 + 0.07)5 FV= 52948(1.07)5 FV= 52948 x 1.225 FV = $ 64,861. b. $99,112 if invested for three years at a 4% interest rate FV= PV (1 + r)t FV= 99112(1 + 0.04)3 FV= 99112(1.04)3 FV= 99112 x 1.

125 FV = $ 111,501. c. $121,124 if invested for seven years at an 2% interest rate FV= PV (1 + r)t FV= 121124(1 + 0.02)7 FV= 112124(1.02)7 FV= 112124 x 1.149 FV = $128,830. d. $929,129 if invested for ten years with a 0.9% interest rate FV= PV (1 + r)t FV= 929129(1 + 0.009)10 FV= 929129(1.009)10 FV= 929129 x 1.09373 FV = $1,016,216. Calculations of the Present Value: a. $455,126 to be received three years from now with a 4% Interest rate PV= FV/(1 + r)t PV= 455126/(1 + 0.04)3 PV= 455126/(1.04)3 PV= 455126 x 0.

889 PV = $404,607. b. $289,231 to be received five years from now with a 5% interest rate PV= FV/(1 + r)t PV= 289231/(1 + 0.05)5 PV= 289231/(1.05)5 PV= 289231 x 0.864 PV = $249,896. c. $921,000 to received two years from now with a 12% interest rate PV= FV/(1 + r)t PV= 921000/(1 + 0.12)2 PV= 921000/(1.12)2 PV= 921000 x 0.797 PV = $734,037. d. $278,111 to be received eight years from now with a 1% interest rate. PV= FV/(1 + r)t PV= 278111/(1 + 0.01)8 PV= 278111/(1.01)8 PV= 278111 x 0.923 PV = $256,696.

Suppose you are to receive a stream of annual payments (also called an "annuity") of $309,723 every year for three years starting this year. The interest rate is 4%. What is the present value of these three payments? PV of Annuity= PVA= A(PVFA)i,n PVA=309723(PVFA).04,3 PVA=309723 x 2.775 PVA=$859,481.32 Suppose you are to receive a payment of $239,201 every year for three years. You are depositing these payments in a bank account that pays 2% interest. Given these three payments and this interest rate, how much will be in your bank account in three years?

FV of Annuity= FVAn=A(FVFA)i,n FVA=239201(FVFA).02,3 FVA=239201 x 3.060 FVA=$731,955. Evaluation of Module 2 Case Assignment The Module 2 case assignment gave me an opportunity to learn about the time value of