Principles of Finance

Principles of Finance

TABLE OF CONTENTS
1. Future Value ................................................................................................................................1
a. Estimating car price..................................................................................................................1
b. Expense at inflation rate of 4%. ..............................................................................................1
c. Car price at inflation rate of 2% for 2 years and 4% for 3 years..............................................1
2. Present Value ..............................................................................................................................2
a. Least at which claims would be sold .......................................................................................2
b. Return of payment in 15 years.................................................................................................2
c. Effect of size of rate of return .................................................................................................2
3. Annuity .......................................................................................................................................2
4. Value of a single amount versus a mixed stream.........................................................................3
REFERENCES................................................................................................................................5

1. Future Value
a. Estimating car price.
a.
At 2% inflation rate
Future Price = Current Price * (1+i)^n
N = Number of Year 5
I = Inflation rate 2.00%
Current Price 14000
Future Price = 14000*((1+0.02)^5)
(at the end of 5th year) 15457.13
At 4% inflation rate
Future Price = Current Price * (1+i)^n
N = Number of Year 5
I = Inflation rate 4.00%
Current Price 14000
Future Price = 14000*((1+0.02)^5)
(at the end of 5th year) 17033.14
b. Expense at inflation rate of 4%.
b.
Price of Car at 5th year end @ 4% = 17033.14
Price of Car at 5th year end @ 2% = 15457.13
If the rate of inflation is 4% instead
of 2%
1576.01
(17033.14 – 15457.01)
c. Car price at inflation rate of 2% for 2 years and 4% for 3 years.
c.
Price of The Car
Future price at 2nd year end
Future Price = Current Price * (1+i)^n = 14000*((1+0.02)^2)
14565.6
Future price at 5th year end
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Future Price = Current Price * (1+i)^n = 14565.6*((1+0.04)^3)
16384.32
2. Present Value
a. Least at which claims would be sold
Present Value = Future Value / (1+i)^n
a.
Investment at 10 Years
Future Value 1000000 1000000 1000000
I = 6.00% 9.00% 12.00%
n = 10 10 10
Present Value = 558394.78 422410.81 321973.24
b. Return of payment in 15 years.
b.
Present Value = Future Value / (1+i)^n
Investment at 15 Years
Future Value 1000000 1000000 1000000
I = 6.00% 9.00% 12.00%
n = 15 15 15
Present Value = 417265.06 274538.04 182696.26
c. Effect of size of rate of return
Different return will have different effects over the cash flows and values. The rate will
effect the inflation rates during the year. During the 10 year period company had higher present
value in comparison to the 15 year period as the rates of discounting are assumed to be same in
both the periods. Time value of money concepts considers the inflation and value that present $
will be able to generate after the given period. The greater the period lesser will be the present
value. Company if invest the amount elsewhere it would be able to generate interest over the
period of time.
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3. Annuity
Present Value of Annuity
PVA = C * [(1+I)^n-1/i]
C = Cash flow per period 12000
I = Interest rate 9.00%
n = Number of payments 25
(1+i)^n 8.62
(1+i)^n -1 7.62
(1+i)^n -1/i 84.70
C*(1+i)^n -1/i 1016410.75
Present Value of Annuity 1016410.75
The maximum value that could be paid for the return of $12000 per year for 25 years is $
1016410.75.
4. Value of a single amount versus a mixed stream
Future Value = PV*(1+i)^n
Future Value of Cash Flows
Alternative 1
Present Value = 24000
i = 7.00%
n = 5
FV of cash flow after 5 years
24000*((1+0.07)^
5)
33661.24
Alternative 2
Year Cash Flow Future Value
1 2000 2805.10
2 4000 5243.18
3 6000 7350.26
4 8000 8560.00
3

5 10000 10700.00
FV of CF after 5 Years = 34658.54
She should adopt for Alternative 2 as the future value of the mixed cash flows is higher than
alternative 1. If she goes for cash flows as per alternative 1 than she will have $33661.24 for
purchasing the house. Where mixed cash flows at the rate of return of 7% will earn generate
higher cash flows for Gina.
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REFERENCES
Books and Journals
Online
[Online]. Available through : <>.
[Online]. Available through : <>.
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