Finance: Compute and Interpret Present and Future Values Analysis

This assignment focuses on the computation and interpretation of present and future values in finance. It begins by explaining the time value of money, emphasizing that receiving money sooner is generally preferable due to potential investment opportunities. The assignment then defines an an...Read More

Running head: COMPUTE AND INTERPRET PRESENT AND FUTURE VALUES
Compute and Interpret Present and Future Values
Name of Student:
Name of University:
Author’s Note:

1COMPUTE AND INTERPRET PRESENT AND FUTURE VALUES
Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................2
Answer to Question 3......................................................................................................................2
Answer to Question 4......................................................................................................................3
Answer to Question 5......................................................................................................................3
Answer to Question 6......................................................................................................................3
References........................................................................................................................................4

2COMPUTE AND INTERPRET PRESENT AND FUTURE VALUES
Answer to Question 1
In general, the time value of money relates to receiving money more than same of money
which is received in the future. This is due to the fact that money invested at the present date can
be invested at a given rate of return. This logic is also applicable to receiving $ 1000 at the
present date is more valuable than receiving $ 100 for ten years. The total investment in the lump
sum is depicted to be worth more at the end of the five years in compare to the incremental
investments of $ 1000 even if the rate of interest applicable is same (Friedman, 2018).
Answer to Question 2
Annuity is considered as a series of payments which is considered with a series payments
which made at the beginning of the each transit in a particular period. Henceforth, the use of the
formula for the future value of the payments is considered with the significant nature of the
payments which are made at the beginning of each transit period. This stream payments are
common characteristic of pension plan and beneficiary (Shu, Zeithammer & Payne, 2016). The
formula for calculating the future annuity value is seen with
P = (PMT [((1 + r) n - 1) / r]) (1 + r)
P= Stream of annuity which is to be paid in the future
PMT= The annuity amount of each payment
R= Rate of Interest
n= No. of tenures for payment
In case of ordinary annuity, the formula is similar to the future annuity except we need to add
extra account for payment which are to be made at the beginning of each year (Rambaud et al.,
2015).
Answer to Question 3
The present value of annuity is considered as the current value of future payments
collected from the annuity at a specified rate. The future cash flows associated to the annuity are

3COMPUTE AND INTERPRET PRESENT AND FUTURE VALUES
discounted as per the discount rate. The higher is rate of discount rate lower will be the present
value associated to the annuity (Delaney, Rich & Rose, 2016).
Answer to Question 4
Scenario 1
Discount Rate 10%
Year
Now 1 2 3
Initial Investment 0
Annual Profit/Loss 0 0 500
Total Cash Flows 0 0 0 500
Discounting Factor 0 0.909 0.826 0.751
Present Value of Cashflows 0 0 0 375.657
Net Present Value 375.657
Answer to Question 5
Scenario 2
Discount Rate 4%
Now 1 2 3 4 5 6 7
Initial Investment 0
Annual Profit/Loss 3,000 0 0 0 0 0 0
Total Cash Flows 0 3,000 0 0 0 0 0 0
Discounting Factor 0 0.962 0.925
0.88
9 0.855
0.82
2 0.790 0.760
Present Value of
Cashflows 0 2884.62 0 0 0 0 0 0
Net Present Value 2884.615
Answer to Question 6
Scenario 3
Discount Rate
4.50
%
Now 1 2 3 4 5 6 7 8
Initial Investment 0
Annual Profit/Loss 250 250 250 250 250 250 250 250
Total Cash Flows 0 250 250 250 250 250 250 250 250
Discounting Factor 0 0.957 0.916 0.876 0.83 0.802 0.768 0.735 0.703

4COMPUTE AND INTERPRET PRESENT AND FUTURE VALUES
9
Present Value of
Cashflows 0
239.2
34
228.9
32
219.0
74
209.
64
200.6
13
191.9
74
183.7
07
175.7
96
Net Present Value 1648.972
References
Delaney, C. J., Rich, S. P., & Rose, J. T. (2016). A Paradox within the Time Value of Money: A
Critical Thinking Exercise for Finance Students. American Journal of Business
Education, 9(2), 83-86.
Friedman, J. (2018, April). A PREVALENT BIAS IN EVALUATING LIFE ANNUITIES.
In Proceedings of PenCon 2018 Pensions Conference (p. 57).
Rambaud, S. C., Maturo, F., & Sánchez, A. M. (2015). Approach of the value of an annuity
when non-central moments of the capitalization factor are known: an R application with
interest rates following normal and beta distributions. Ratio Mathematica, 28(1), 15-30.
Shu, S. B., Zeithammer, R., & Payne, J. W. (2016). Consumer preferences for annuity attributes:
Beyond net present value. Journal of Marketing Research, 53(2), 240-262.