Assessment 3
Respond to three questions and solve three computational problems about time value of money (TMV) as it applies to single cash flow.
Time value of money (TVM) is the foundation of mathematical finance. It is important to be able to demonstrate how the TVM concept can be applied to corporate finance, as well as to personal finances. It addition, knowing how to apply various technical terms used in finance, such as discount rate, present value, and future value, is a useful skill.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
• Competency 1: Evaluate the global financial environment.
o Calculate the future value of a savings account.
o Calculate the future value of an initial deposit.
o Calculate the annual rate of return on an investment that has increased in value over time.
• Competency 2: Define finance terminology and its application to within the business environment.
o Explain the concept of cash flow in corporate finance.
o Explain how present value and future value are related.
• Competency 3: Evaluate the financial health of an organization.
o Explain how present values are affected by changes in interest rates.
Assessment Instructions:
Respond to the questions and complete the problems.
Questions-
In a Word document, respond to the following. Number your responses 1–3.
1. Explain the concept of cash flow in corporate finance.
2. Explain how present value and future values are related.
3. Explain how present values are affected by changes in interest rates.
Use references to support your responses as needed. Be sure to cite all references using correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.
Problems-
In either a Word document or Excel spreadsheet, complete the following problems.
• You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet.
• If you choose to solve the problems algebraically, be sure to show your computations.
• If you use a financial calculator, show your input values.
• If you use an Excel spreadsheet, show your input values and formulas.
In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.
Unless otherwise directed, assume annual compounding periods in the computational problems.
1. If you deposited $250 in your savings account today, and the bank pays 4 percent interest per year, how much would you have in your savings account after 9 years?
o Recalculate the account balance using a 6 percent interest rate and a 7 percent interest rate.
2. A $450 deposit earns 6 percent interest in the first year, 3 percent interest in the second year, and 7 percent interest in the third year. What is the future value at the end of the third year?
3. What is the annual rate of return for an $8,000 investment if in five years it grows to $12,500?
o Assuming the growth occurred in six years and then eight years, recalculate the rate of return for these two scenarios.
Suggested Resources:
The following optional resources are provided to support you in completing the assessment or to provide a helpful context.
Library Resources:
• Weaver, S. C., & Weston, J. F. (2001). Finance and accounting for nonfinancial managers. New York, NY: McGraw-Hill.
• Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: American Management Association.
Course Library Guide
You are encouraged to refer to the resources in the BUS-FP3062 – Fundamentals of Finance Library Guide to help direct your research.
Other Resources
• Cornett, M., Adair, T., & Nofsinger, J. (2019). M: Finance (4th ed.). New York, NY: McGraw-Hill. Available in the courseroom via the VitalSource Bookshelf link.
Time Value Of Money: Single Cash Flow
1.
Sherman (2011) defines cash flow, as used in business finance, as the receipt of money, generally from a sale. In essence, cash flow refers to the cash and other cash equivalents flowing in and out of an entity. In this context, cash equivalents are assets that can easily be converted into cash and may include bank deposits, overdrafts and short-term investments. Cashflows are vital in corporate finance because they inform stakeholders of the firm’s financial health. Notably, positive cashflows signify a firm’s success and ability to meet its short and long financial obligations such as paying loans.
2.
Shrotriya (2019) describes the present value as the value of money as on date and the future value as the value of money on a future date. In corporate finance, the present value is the current value of a future cash flow at a given rate of return while the future value is the value of a current cashflow at a given rate of growth. Present and future value are related because the future value reflects a compounded interest of the present value. For example, to get the future value, one must multiply the current value by the compounding interest. Similarly, one can derive the present value by dividing the future value by the compounding interest.
Interest rates are among the variables that affect present value. Interest rate affects the present value by either increasing and lowering it. For example, studies show that a higher interest rate reduces the present value of cash flows. In comparison, a lower interest rate increases the cashflows (“The relationship between present and future value,” n.d.). This effect mainly stems from the idea of the present amount of money set aside to earn a given amount in the future. Notably, at a higher interest rate, individuals would need to set aside a small amount of money to make a specified cashflow in the future.
References
“The relationship between present and future value” (n.d.). Lumen Learning. https://courses.lumenlearning.com/boundless-finance/chapter/additional-detail-on-present-and-future-values/
Sherman, E.H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). American Management Association.
Shrotriya, V. (2019). Time value of money- The concept and its utility. International Journal of Research and Analytical Reviews, 6(1), 85-92. https://www.researchgate.net/publication/337464889_TIME_VALUE_OF_MONEY_-THE_CONCEPT_AND_ITS_UTILITY
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