Time Value of Money Analysis

The assignment content discusses various financial concepts and formulas for calculating payback period, net present value (NPV), internal rate of return (IRR), present value, future value, compounding cash flow, discounting cash flow, effective rate, and annuity payment. The calculations are provided in Excel sheets and the results indicate that the project should be accepted due to its positive NPV and IRR exceeding the required rate of return.

Page No: 205-206
1. Pay-back period
The formula for calculating payback period-= Cash outflow/ cash inflow
Following excel shows the calculations:
Yrs Cash flow C.F.
0 -280,000 -
1 100,000 -180,000
2 100,000 -80,000
3 100,000 20,000
4 125,000 145,000
5 150,000 295,000
Payback period = 4+ 135,000/150,000
= 4.9 yrs.
Thus, the payback period is 4.9yrs
2. NPV
The formula for calculating Net present value = Cash inflow- Cash outflow
= 331,150 – 280,000
= 51,150
Following excel shows the calculations:
Yrs Cash flow pvf @20%Cash flow
0 -280,000
1 100,000 0.833 83300
2 100,000 0.694 69400
3 100,000 0.579 57900
4 125,000 0.482 60250
5 150,000 0.402 60300
331150
Thus, the NPV is positive 51,150
3. IRR
Following excel shows the calculations:

Yrs Cash flow
0 -280,000
1 100,000
2 100,000
3 100,000
4 125,000
5 150,000
IRR 0.275
Thus, the IRR is 0.275
4. Factors which influence the decision making for selecting the project.
The project should be accepted because of the following reasons:
 Net present value of the project is positive
 Internal rate of return exceed required rate of return
Page: 121
3.
a. Present value of the proposed least payment
Following excel shows the calculations:
1 25,000
2 30,000
3 35,000
4 40,000
5 25,000
PV 116660.250
Thus the PV from NPV function is 116,660.250
b. Future value
Following excel shows the calculations:

1 25,000
2 30,000
3 35,000
4 40,000
5 25,000
Total 155,000
FV 187851.974
Thus the FV is 187,851.974
4.
Time value of money shows the importance of money in the present. It tells the benefits of receiving
money in the present rather than future. The value of the money with the span of time. There are two
types of cash flows: discounting cash flow and compounding cash flow.
 Compounding cash flow is used to find the future value of money when the present value is
given.
 Discounting cash flow is used to find the present value of money when the future value of the
money is given.
Page-119-120
1.
a. Future value
Following excel shows the calculations:
Yrs Cash flow
PV 100,000
Rate 2,1,3%
t 3
FV-1 106111.619
FV-2 $103,021.01
FV-3 $109,263.43

b. Effective rate and future value
Following excel shows the calculations:
PV 100,000
Nominal Interest 0.25
t 36
Effective rate 0.003
FV 109,292
2.
a. Present value
Following excel shows the calculations:
FV 500,000
Nominal Interest 0.03
t 3
PV 457,562
b. Rate
Following excel shows the calculations:
PV 450,000
FV 500,000.00
t 3
Rate 0.036
c. Annuity payment
Immediate annuity payment plan is used in this question.

Following excel shows the calculations:
Amount 500,000
Interest 0.48
t 36
Annual payment 215,999.982
The equal annual payments is 215,999.982