Reference no: EM131317844
Why does money have a time value? Can you provide at least one real-life scenario in which you can apply the concept of “time value of money”?
To give you some idea of how TVM applies in daily life in a firm, consider the following scenario:
Suppose a local car dealer has an idea to attract customers by offering them a "Tires for Life" incentive program. The way it would work is when a customer buys a car from the dealership, the dealership agrees to replace the tires on the car whenever needed at no charge for as long as the customer owns the car.
The program would have a cost to the dealership, of course, so to offset that cost, the CEO proposes that the cost of the program be added to the price of each car they sell. In this way the program wouldn't cost the dealership anything.
Now imagine that you are a financial analyst working at the car dealership and the CEO has approached you with this question:
“How much does the dealership have to add to the price of a car to cover the cost of the incentive program?”
For example, let’s assume the following:
One customer is going to take advantage of the deal, and the car purchase is to take place today.
The length of time the car is expected to be owned is 9 years.
Replacement tires will be needed every 3 years.
A set of replacement tires costs $400.
Funds set aside to finance the incentive program can be invested at 3%
The CEO has asked you to brief him on how much they need to add to the price of a car to finance this initiative by the end of this week. What will you tell him?
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Expected return-standard deviation diagram
: The T-bill rate is 7%. You estimate that a passive portfolio invested to mimic the S&P 500 stock index yields an expected rate of return of 13% with a standard deviation of 25%. In Figure 1, draw the CML and your fund's CAL on an expected return/s..
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Form of performance measurement and management
: Note: Include a link to this BSC if available.Explain how useful you think the BSC is as a form of performance measurement and management for this particular organisation.
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Explain the various digital laws and legislation
: Explain, in detail, what you believe to be the greatest challenge facing law enforcement agencies investigating exploitation, cyber stalking, and obscenity. Provide a rationale for your response.Identify the specific challenges that overlapping o..
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Apply the concept of time value of money
: Why does money have a time value? Can you provide at least one real-life scenario in which you can apply the concept of “time value of money”? Funds set aside to finance the incentive program can be invested at 3%. The CEO has asked you to brief him ..
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Determining the monthly mortgage payment
: You borrow $200,000 to buy a house. The mortgage interest rate is 4.5 percent and the loan period is 30 years. Payments are mademonthly. What is your monthly mortgage payment?
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What is the current price of the stock
: Ginger Baker, Inc. just paid an annual dividend of $3 a share and this dividend is expected to grow at a rate of 4% per year for the foreseeable future. If the discount rate for Ginger Baker is 9%, what is the current price of the stock?
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Computer-based order entry system
: Your firm is contemplating the purchase of a new $777,000 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $53,000 at the end of that time. Working capital will revert ..
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What is the standard deviation of returns
: The common stock of Air United had annual returns of 13.7 percent, 4.8 percent, -6.7 percent, and 27.9 percent over the last four years, respectively. What is the standard deviation of these returns?
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