Strategic Corporate Finance

Trident International University

Case 2

FIN501 – Strategic Corporate Finance

Kent A. Vander Kamp 11/5/2012

The idea behind the concept of present value or time value of money is that $1 received today is greater than a $1 received in some years from now (Mayes, 1995-2011). Present value is current value based on a specified future sum. This concept is important in evaluating investment proposals. Present value is a basic concept used in corporate finance. Because of its importance in every aspect from project evaluation to valuing equity bond and other securities, present value is taught very first in the class. Obtaining the present value of future cash flows and comparing the sum to the initial outlay to determine whether the proposed project is acceptable or not is significant. If the sum of the present value of all the future cash flows is greater than the initial outlay, the project is accepted. However, if the sum is less than the initial cash outlay, the investment proposal is usually rejected. Future cash flows must be discounted to the present so that they are comparable to the initial outlay--present value (incurred in the present). Future cash flows along with the initial outlay cannot be compared when making a decision (Keown, Martin & Petty, 2007). Future Values Future value = Amount invested x FVIF “Future Value of $1 at the end of n periods” (Brealey, Myers, & Allen, FVIF= 2012) It can be read from tables or calculated using the following equation FVIF(n, r%)= =(1+r%)^n a. $190,537.19 invested over six years at 8% n= r= FVIF 6 years 8.00% (6 periods, 8.% rate) = $190,537.19 $302,382.52 = $190,537.19 x 1.587

1.587

Amount invested= Therefore, future value= Answer: $302,382.52

b. $231,891.22 invested over four years at 9%

n= r= FVIF

4 years 9.00% (4 periods, 9.% rate) = $231,891.22

1.412

Amount invested= Therefore, future value= Answer: $327,430.41

$327,430.41 = $231,891.22. x 1.412

c. $310,891.12 invested over...