389 words - 2 pages

BUSN 5200

Homework Assignment for Week 6:

For Week 6, please turn in the answers to the following questions:

1. Why do we say money has time value? Money to be received or paid at one time is not the same value of money to be received in the future.

2. Why is it important for business managers to be familiar with time value of money concepts? Managers need to consider the concepts when making decision.

3. Define Present Value. The present value tells us what s future sum or sums would be worth if we had those funds today.

6. (calculating future value) You buy a 6 year, 8% CD for $1,000. Interest is compounded annually. How much is it worth at maturity?

Present value $1,000

Interest rate 8%

Years 6

Future value $1,587

7. (calculating present value) What's the present value of $1,000 to be received in 8 years? (Your required rate of return is 7% a year.)

Present value $1,000

Interest rate 7%

Years 8

Future value $ 582

8. (calculating the rate of return) A friend promises to pay you $600 two years from now if you loan him $500 today. What interest rate is your friend offering you?

Present value $ 500

Future value $600

Time 2 years

Interest 9.54%

9. (calculating the future value of an annuity) If you invest $100 a year for 20 years at 7% annual interest, how much will you have at the end of the 20th year?

Present value $100

Years 2

Interest 7%

Future value 4,100

10. (calculating the present value of an annuity) How much would you be willing to pay today for an investment that pays $800 a year at the end of the next 6 years? (Your required rate of return is 5% a year.)

Payment $800

Years 6

Interest 5%

Present value $4, 061

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