Question

8. a) (Solving for n?) How many years will it take for $520 to grow to ?$1058.91 if? it's invested at 8 percent compounded? annually? (Round to one decimal? place.)

b) (Present value) Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of ?$395,000 due in 26 years. In other? words, they will need ?$395,000 in 26 years. Toni? Flanders, the? company's CEO, is scrambling to discount the liability to the present to assist in valuing the? firm's stock. If the appropriate discount rate is 7 percent, what is the present value of the? liability? (Round to the nearest? cent.)

Answer 1

The following screenshot has the answers to both the questions.

Time value of money questions are really simple, you have to just plug in the values and you get the answer, simple!

We can use the financial calculator or excel for this.

We have four variables. PV = Present Value (Which we invest), FV = Future value(Which we get at maturity), Pmt = Payments made every year, N is the number of periods, I/Y is the interest rate/Discount rate.

A. For calculating the number of period we just used to simple formula

No of period formula : =NPER(C7,C6,C4,C5) or =NPER(rate,pmt,pv,fv). Just fill in the values in the cell and select the cells according to the formula. You can put the same values in the financial calculator and you’ll get the same answer.

B. For Present Value we have a similar formula

Present Value Fomula : =PV(E7,E8,E6,E5) or =PV(rate,nper,pmt,fv). Again, you have to just plug and play. Remember to use % sign after Interest rate value. And to put a negative sign before PV value. As it is the amount we pay in the present. That is why we get a negative value for PV in this part.

You’ll notice in the TVM (Time value of money) questions that you only have to recognize the values of all these variables. Once you do the same, the process is pretty easy after that.