Mitsubishi Electronic Corporation – Time Value of Money

Mitsubishi Electronic Corporation – time value of money

John Paul Lowenthal,

Case Analysis

CONCEPTS

A.)

i. You will rather receive $100 today because it could be invested to earn income. For instance, if the $100 could be invested to earn 10% per year, the $100 will accumulate to $110 ($100 plus $10 of earnings) in one year.

ii. According to investopedia.com, a lump-sum payment is “A one-time payment for the total or partial value of an asset. A lump-sum payment is usually taken in lieu of recurring payments that would otherwise be received over a period of time. The value of a lump-sum payment is generally less than the sum of all payments that the party would otherwise receive, since the party paying the lump-sum payment is being asked to provide more funds up front than it otherwise would have been required to.” For example, we can see lump-sum payments done when an individual wins the lottery.

iii. “An annuity is a series of equal payments at regular intervals. Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments. Annuities are classified by the frequency of payment dates. The payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other interval of time.” (www.investopedia.com).

An ordinary annuity consists of three characteristics: (www.accountingtools.com)

* All payments are in the same amount.

* All payments are made at the same intervals of time

* All payments are made at the end of each period.

An annuity due is considered very similar to an ordinary annuity following its three characteristics with the exception of when the payments are made. In ordinary annuity payments are made at the end of each period. In contrast, annuity due, all payments are made at the beginning of each period. This means “annuity due has a higher present value than ordinary annuity.” (www.accountingtools.com)

iv. Simple interest differ...