Present and Future Value of Cash Flow Discussion

Week 3 – Discussion Forum

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Your initial discussion thread is due on Day 3 (Thursday) and you have until Day 7 (Monday) to respond to your classmates. Your grade will reflect both the quality of your initial post and the depth of your responses. Refer to the Discussion Forum Grading Rubric under the Settings icon above for guidance on how your discussion will be evaluated.

 Present and Future Value of Cash Flow [WLO: 1] [CLO: 1]

The projected amount and timing of cash flows received from an investment impacts the value of that investment. The longer it takes to receive a payment, the less valuable it is to the investor today. The key to comparing different investments is to determine the value of each investment in today’s terms. Every investment can be valued in today’s terms using time value of money mathematics. For this discussion forum, you will practice calculating the value of cash flows using the principles of time value of money mathematics.

Time value of money concepts and math form the cornerstone of finance. This discussion is an opportunity for you to practice using these formulas and to progress in your understanding of this important topic. You will use these concepts later in this course, in other finance courses, and throughout a career in finance. Like many concepts, each time you work with time value of money problems you may develop a slightly different, deeper, and more thorough understanding of the theory. Some of you may be quite comfortable using these formulas, while others may need to spend extra time focusing on the mathematics. However, all of you can progress in your abilities through this discussion activity.

Prepare:

Prior to beginning work on this discussion forum,

• Read Chapter 4 of Essentials of finance.
• Complete the Week 3 – Learning Activity 1.
• Review the Solving Time Value Money Problems Using Google Calculator (Links to an external site.) handout.

Calculate:

• Calculate a time value of money problem, according to first letter of your last name, and the equation provided for each problem. The equations listed are in the textbook throughout Chapter 4 using the notations 4.XX for each formula, and in the Chapter 4 Summary.

Last NameProblemEquationA through BCompute the future value of $2,000, at an interest rate of 5%, compounded annually, in 6 years.

Equation 4.11:

FVn=PV0×(1+r)nFVn=PV0×(1+r)n

C through DCompute the future value of $1,000, at an interest rate of 3%, compounded annually, in 4 years.

Equation 4.11

FVn=PV0×(1+r)nFVn=PV0×(1+r)n

E through FCompute the present value of $5,000 received in 6 years, using a discount rate of 2%.

Equation 4.14:

PV0=FVn×(1+r)−nPV0=FVn×(1+r)−n

also expressed as:

G through ICompute the present value of $10,000 received in 4 years, using a discount rate of 7%.

Equation 4.14:

PV0=FVn×(1+r)−nPV0=FVn×(1+r)−n

also expressed as:

PV0=FVn(1+r)nPV0=FVn(1+r)n

J through KCompute the future value of annual payments of $100, paid for 5 years, with an interest rate of 8% (compounded).

Equation 4.17:

FVn=CF1×(1+r)N−1+CF2×(1+r)N−2+…CFnFVn=CF1×(1+r)N−1+CF2×(1+r)N−2+…CFn

L through MCompute the future value of annual payments of $1,000, paid for 4 years, using an interest rate of 3% (compounded).

Equation 4.17:

FVn=CF1×(1+r)N−1+CF2×(1+r)N−2+…CFnFVn=CF1×(1+r)N−1+CF2×(1+r)N−2+…CFn

N through PCompute the present value of annual cash payments of $200 per year, for 4 years, using a discount rate of 5%.

Equation 4.16:

PV0=CF1(1+r)1+CF2(1+r)2+…CFn(1+r)nPV0=CF1(1+r)1+CF2(1+r)2+…CFn(1+r)n

Q through SCompute the present value of annual cash payments of $600 per year, for 3 years, using a discount rate of 8%.

Equation 4.16:

PV0=CF1(1+r)1+CF2(1+r)2+…CFn(1+r)nPV0=CF1(1+r)1+CF2(1+r)2+…CFn(1+r)n

T through VCompute the present value of a $400 cash payment received in perpetuity, using a discount rate of 10%.

Equation 4.19:

PV0=CFrPV0=CFr

W through ZCompute the present value of a $750 cash payment received in perpetuity, using a discount rate of 6%.

Equation 4.19:

PV0=CFrPV0=CFr

Need help with your calculations? Check out the videos included in this resource: Week 3 Discussion Help (Links to an external site.).

Write:

• Write out each step you used to solve the problem you were assigned, and provide the solution to the problem as well.
  • Present your final solution as a decimal approximation carried out to the second decimal point (e.g., $000.00).
• Explain the meaning of the problem and your solution in your own words.
• Explain your answers to the following questions:
  • If the rate in the problem was higher, would the solution be higher or lower?
  • If the time period in the problem was shorter, would the solution be higher or lower?
• Describe an element of this problem that was challenging to you.
• Ask at least one question about time value of money mathematics.