Mod2 SLP: Financial decision making - Math Problem Example

Question S= 3800000 S= Future Value P= ? P= Present Value r= 5% r= interest rate t yr t= time S=P rt) 3800= P 0.05 P= $3619 Question#2 Account A Account B S= 4100 S= 5500 P= ? t= 2 yrs t= 1 yr P= ? r= 5% r= 5% S=P(1+rt) S=P(1+rt) 4100= P(1+(0.05)(1)) 5500= P(1+(0.05)(2)) P= $3905 P= $4989 Combined PV= 3905+4989= $8894 Question#3 S= 158000 r= 7% P= ? YEAR 1 t= 1 yr S=P(1+rt) 158000= P(1+(0.07)(1)) P= $147663.55 S= 246000 r= 7% P= ? YEAR 2 t= 2 yr S=P(1+rt) 246000= P(1+(0.07)(2)) P= $215789.47 S= 289000 r= 7% P= ?

YEAR 3 t= 3 yr S=P(1+rt) 289000= P(1+(0.07)(3)) P= $238842.97 Amount you have to invest today for all 3 future payments is: P= $602296 Money on hand today is worth more than tomorrow, therefore it is important that we understand the concept of time value of money. This concept illustrates that the present value of money on hand at time zero will be worth more in the future depending on the interest rate prevalent in the market (Besley and Brigham, 2000). In the questions given had to find out the present value of money at different interest rates as well as time periods.

We used the formula S=P (1+r) ^t where “S” represents the future amount, “P” represents the present amount, “r” represents rate of interest and “t” represents time period. This formula is frequently used in order to determine the worth of money on hand in the future. In the first question we were given the interest rate, future value and the time period. By using this formula we get the present value of the amount. Question 2 gave us two options with their future value, interest rate as well as time.

We calculated the present value of both the options by the same formula as illustrated previously. Question 3 presented us with three different cash flows and we had to discount them back to get their present value. This brings us to another concept of discounted cash flow. Discounted cash flow or DCF is a natural consequence of the time value of money. It works on the principle that a dollar today is not worth the same as a dollar in future (Ehrhardt & Brigham 2004). DCF analysis takes the cash flows for each period and discounts it back to time zero (t=0) i.e. today.

We applied DCF concept to get present value of all future cash flow using S=P (1+r) ^t formula. Different questions in the assignment resulted in different answers but the formula, method and the reason of doing the question is same which is to calculate the present value of the amount. Hence, it has been concluded that with the help of the above mentioned formula one can easily project the present value of the future amount and can invest accordingly without being deceived. References: Besley, S.

, & Brigham, E. F. (2000). Essentials of managerial finance. Washington, DC: South-Western College. Ehrhardt,C.E., & Brigham, E. F. (2004). Financial Management: Theory and Practice . Washington, DC: South-Western College.