Finance

Chapter 6

Question:

1. Why are time value concepts important in ordinary business dealings, especially those involving contracts?

Business contracts and agreements generally specify payments that are due at future times. If such payments are more than a few months into the future, the correct analysis of the value of the agreement depends on recognition of the time value of money.

4. Calculate the present value of one dollar 30 years in the future at 10% interest. What does the result tell you about very long-term contracts?

PV = FV [PVF10,30]

PV = 1[0.0573]

PV=0.0573

Problem

1. The Lexington Property Development Company has a $10,000 note receivable from a customer due in three years. How much is the note worth today if the interest rate is

a. 9%?

b. 12% compounded monthly?

c. 8% compounded quarterly?

d. 18% compounded monthly?

e. 7% compounded continuously?

a. PV = FV [PVF9,3]

=10000[0.7722]

=7722

b. PV=FV [PVF1,36 ]

=10000[0.6989]

=6989

c PV=FV [PVF2,12 ]

=10000[0.7885]

=7885

d PV=FV [PVF1.5,36 ]

= 10000[0.5885]

=5885

2. What will a deposit of $4,500 left in the bank be worth under the following conditions:

a. Left for nine years at 7% interest?

b. Left for six years at 10% compounded semiannually?

c. Left for five years at 8% compounded quarterly?

d. Left for 10 years at 12% compounded monthly?

a. FV = $4,500 [FVF7,9] = $4,500 (1.8385) = $8,273.25

b. FV = $4,500 [FVF5,12] = $4,500 (1.7959) = $8,081.55

c. FV = $4,500 [FVF2,20] = $4,500 (1.4859) = $6,686.55

d. FV = $4,500 [FVF1,120] = $4,500 (3.3004) = $14,851.80

10. How much will $650 per year be worth in eight years at interest rates of

a. 12%

b. 8%

c. 6%

a. FVA = $650 [FVFA12,8] = $650...