Business math-tvm concepts

Assignment Help Finance Basics

Reference no: EM1328002

1. Why is the time value of money concept important? In what quantitative decisions might the time value of money be used? How do you apply the time value of money concept to make decisions in your personal life? How might you use the Time Value of Money concept as a quantitative reasoning tool in business?

2. If you look at the formula to calculate the dollar amount of $1 you put into savings today, you see that it is fv = pv*((1+i)^n). The variables are fv = future value, pv = present value, i = interest rate per period, and n = the number of periods. In the formula, n is an exponent. What does the exponent in this case state that you need to do mathematically to the (1 + i) segment of the formula? Select a different interest rate than your classmates who have already answered this question, as well as a different number of periods. How much money would you have at the end if you invested $1 today (pv)?

3. Often in personal finance we want to know what our $1 investment today will be worth in 20 years. In business however, there is more concern with answering the question, "If I receive $100 in 5 years, what is that worth today?" To answer this question, modify the formula fv = pv*((1+i)^n) and use the reciprocal. Simply stated, the reciprocal of a number is 1 divided by the number; the reciprocal of 10, for example, is 1/10. In the formula above, we divide both sides by ((1+i)^n), which creates a new formula where the fv is multiplied by the reciprocal of the original: fv*(1/((1+i)^n))=pv. Select an interest rate and number of periods to calculate the present value of $100 received in the future. What would the value of $100 in the future be today given the interest rate and number of periods you selected?

Reference no: EM1328002

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