# Fn Questions Essay example

INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY

Answers to Concepts Review and Critical Thinking Questions

1. The four parts are the present value (PV), the future value (FV), the discount rate (r), and the life of the investment (t).

2. Compounding refers to the growth of a dollar amount through time via reinvestment of interest earned. It is also the process of determining the future value of an investment. Discounting is the process of determining the value today of an amount to be received in the future.

3. Future values grow (assuming a positive rate of return); present values shrink.

4. The future value rises (assuming it’s positive); the present value falls.

5. It would appear to be both deceptive and unethical

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CHAPTER 5 B-2

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Solutions to Questions and Problems

NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem.

Basic

1. The simple interest per year is:

$5,000 × .08 = $400

So after 10 years you will have:

$400 × 10 = $4,000 in interest.

The total balance will be $5,000 + 4,000 = $9,000

With compound interest we use the future value formula:

FV = PV(1 +r)t

FV = $5,000(1.08)10 = $10,794.62

The difference is:

$10,794.62 – 9,000 = $1,794.62

2. To find the FV of a lump sum, we use:

FV = PV(1 + r)t

FV = $2,250(1.10)11 = $ 6,419.51

FV = $8,752(1.08)7 = $ 14,999.39

FV = $76,355(1.17)14 = $687,764.17

FV = $183,796(1.07)8 = $315,795.75

3. To find the PV of a lump sum, we use:

PV = FV / (1 + r)t

PV = $15,451 / (1.07)6 = $ 10,295.65

PV = $51,557 / (1.13)7 = $ 21,914.85

PV = $886,073 / (1.14)23 = $ 43,516.90

PV = $550,164 / (1.09)18 = $116,631.32

CHAPTER 5 B-3

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4. To