Question

In: Finance

A. The president of a company wants to make two equal lump-sum deposits, one at two...

A. The president of a company wants to make two equal lump-sum deposits, one at two years and the second at four years from now, so she can make five $100 per year withdrawals starting when the second deposit is made. Further she plans to withdraw an additional $500 the year after the series ends. Draw this Cash Flow Diagram {no calculations). {l. Pt.) B. Define "Time Value of Money". (2 Pts.) C. What factor would you use to determine the value in today's dollars of depositing a fixed installment amount for "n" years. (State its name and show its standard notation.) (2 Pts.) D. True or False: In order to directly use the "Geometric Series Present Worth" factor, the first cash flow of the series must begin in period 1. (2'. Pts.) E. Write the formula for the future value of a principal amount earning simple interest over "n" periods of time.

Expert Solution

a)

Lump-sum deposit at 2nd year and 4th year (outflow)

From the 4th year (second deposit) he can make 5 annual withdrawals of $100 (per year inflow)

So withdrawals starts from 4th year and ends at 8th year

At the end of 8th year there will be additional withdrawal of $500 (inflow)

The cash flow diagram is

(b)

What Is the Time Value of Money (TVM)?

The time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also sometimes referred to as present discounted value.

(c)

present value factor (PVF) will be used to determine the present value of an annuity for n years

where p = fixed installment

r = rate of interest

n = no. of years annuity is carried

(d)TRUE

Therefore A represents the cash flow in period 1 which is important for calculating the fomula

(e)

future value of simple interest = > A = P (1 + rt)

where A = FUTURE VALUE (AMOUNT + INTEREST)

P = PRESENT VALUE OR PRINCIPLE

r = RATE OF INTEREST

t = TIME PERIOD FOR INTEREST

jeff jeffy answered 2 years ago

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