Concept of Present Value - 1279 Words

WHY IS THE CONCEPT OF PRESENT VALUE SO IMPORTANT FOR CORPORATE FINANCE? The importance of concept of present value to the world of corporate finance is that present value calculations are widely used in business and economics to provide a means to compare cash flows at different times. Present Value’s definition and simplistic formula used for normal purchases, the concept’s importance to corporate finance and why present value is the very first topic taught in finance classes explain that present value is an essential knowledgeable tool to ensure we make the best decisions with our money. However, first, What Does Present Value - PV Mean? Present value is â€Å"the current worth of a future sum of money or stream of cash flows given a†¦show more content†¦$7700 to be received three years from now with a 5% interest rate PV = 7700 / (1 + .05) ^ 3 = 7700 / (1.157625) = $6651.55 3b. $1500 to be received five years from now with a 7% interest rate PV = 1500 / (1 + .07) ^ 5 = 1500 / (1.4025517) = $1069.48 3c. $7200 to received two years from now with an 11% interest rate PV = 7200 / (1 + .11) ^ 2 = 7200 / (1.2321) = $ 5843.68 3d. $ 680,000 to be received eight years from now with a 9% interest rate. PV = 680000 / (1 + .09) ^ 8 = 680000 / (1.9925626) =Show MoreRelatedWeek 5 Reflection Essays680 Words   |  3 PagesWeek Five Reflection The concept of time value of money is accounting is the relationship between time and money (Kieso, Wygandt, amp; Warfield, 2007). The common expression is that money today is worth more than the assurance of money received tomorrow. The reason for this saying is the investment opportunities and borrowing options. Understanding how to compare present and future values of money and learning how to use the different time values of money is important in accounting andRead MoreThe Time Value of Money875 Words   |  4 Pagestime value of money, and illustrate that I understand the concept. First, there will be an explanation of the key concepts of time value of money, including why it is important to know what these concepts are and how they are applied to the real world. The report will also contain several calculations made using present and future value tables. The calculations illustrate that not only do I understand the concepts but that I can apply them to mathemati cal computations. 1. The time value of moneyRead MoreFinancial Statements Of Business Enterprises1245 Words   |  5 PagesConcept No. 5: Recognition and Measurement in Financial Statements of Business Enterprises Financial statements are the core component of financial reporting and contain sections or elements outlined in FASB SFAC Concept No. 6. In order for data or information to be contained within the financial statements it must go through a formal process of recognition. An element that is included in the financial statements will be qualitative and quantitative and must meet the formal definition of eitherRead MoreTime Value of Money1033 Words   |  5 PagesTime Value of Money (TVM), developed by Leonardo Fibonacci in 1202, is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM is based on the concept that a dollar today is worth more than a dollar in the future. That is mainly because money held today can be invested and earn interest. A key concept of TVM is that a single sum of money or a series of equal,Read MoreExplain the Concept of Discounting and Its Importance in the Theory of Investment Expenditure.1692 Words   |  7 Pagesto treat the value of a pound that is received in the future to be equal to the value of a pound received today. One reason is that due to rising inflation, the true value of the currency will depreciate over time, and this results in a fall in the purchasing power of a pound. Rational economic agents also tend to value near term benefits more than the long term benefits because of the future uncertainties and risks. This phenomenon is described as time preference. Hence, the concept of discountingRead MoreFactors That Affect the Time Value of Money1100 Words   |  5 PagesFactors that Affect the Time Value of Money Time value of money is the concept that an amount of money in one s possession is worth more than that same amount of money promised in the future (Garrison, 2006). The reason for this is that money today can be invested to earn interest and therefore will be worth more in the future (Brealey, Myers, Marcus, 2004). This paper will explain how annuities affect time value of money (TVM) problems and investment outcomes. In addition, this paper will brieflyRead MoreEssay on Time Value Of Money1655 Words   |  7 PagesTime Value of Money Time Value of Money To make itself as valuable as possible to stock holders; an enterprise must choose the best combination of decisions on investment, financing and dividends. In any economy in which firms have the time preference, the time value of money is an important concept. Stockholders will pay more for an investment that promises returns over years 1 to 5 than they will pay for an investment that promises identical returns for years 6 through 10. Essentially oneRead MoreCapital Budgeting Strategies841 Words   |  4 Pagesthe net present value, (NPV) analysis. The incremental cash flows identifies sales of $3 million a year that equals an increase in gross margin of $150,000 given a 5% gross margin and initial investment of $10 million that includes the cost of building the new factory (Gitman, 2009). The savage value at the end of the project life equals $14 million. Given a 10% weighted average cost of capital, table 1 shows the computed NPV for the project. Table 1 Year | Cash Flow | PV Factor | Present ValueRead MoreCritical Thinking Essay example1031 Words   |  5 Pagesconclusion clearly. | Does not correctly identify issue and conclusion, confuses concept of issue and conclusion. | 2. What are the reasons? | Clearly identifies and succinctly summarizes all major reasons offered in the memo. | Identifies some of the main reasons, but includes items that are not reasons and/or fails to identify major reasons. | Does not identify main reasons, confuses reasons with other concepts. | 3. What words or phrases are ambiguous? | Identifies the most important ambiguousRead MoreWhat Is Time Value of Money?923 Words   |  4 PagesWhat is time value of money? The simple answer towards this question is that the same amount of money will have different value at different time. By this definition money is separated into its nominal value, which is the face amount, and the real value, which is the purchasing power of the money. The real reason here is that inflation exists, therefore when the price of a good goes up the same amount of money that was previously require to buy that good will not be able to buy that same good after