Question

1. What is the concept of time value of money? 2. Write down the three rules of time travel discussed in Chapter 5 class notes. 3. True or False? a) A timeline is meaningful even if all cash flows do not occur annually. b) A timeline is NOT meaningful unless all cash flows occur annually. c) Timelines can be constructed in situations where some of the cash flows occur annually but other cash flows occur quarterly. d) Timelines cannot be constructed in situations where some of the cash flows occur annually but other cash flows occur quarterly. 4. Suppose you must pay tuition of $10,000 per year for the next four years. Your tuition payments must be made at the start of each year. By the end of the fourth year, your employer will reimburse you the total $40,000 you have paid. a) Draw the timeline. b) Some people say that since your employer covers your $40,000 tuition, your four-year study costs you $0. Based on the concept of time value of money, do you agręe with this comment, or no? Why? 5. Calculate the future value of $10,000 deposited today for five years, given a 6% annual interest rate. 6. How much will accumulate in an account with an initial deposit of $1,000, and which earns 10% interest per year for three years? 7. How much should be deposited in an account earning 8% annually to accumulate a 20% down payment to purchase a $40,000 car one year from now? Assume the car's price will be $40,000 in a year. 8. Calculate the present value of $10,000 to be received in five years, given a 6% annual interest rate? 9. How many years must one wait for an initial investment of $1,000 to triple in value if the investment earns 12% compounded annually? ( N) 10. You save $10,000 today. How long will it take for you to double your money if you can earn interest at an annual rate of 20%?( N) 11. If we deposit $700 into an account today, the value in the account will become $998.88 in 5 years. Calculate the annual interest rate (r)

Answer 1

1. The time value of money is the concept that the value of money today is worth more than the same amount in the future due to its potential earning capacity.

2. The three rules of time travel discussed in Chapter 5 class notes are not provided in the given context.

3. True. a) A timeline is meaningful even if all cash flows do not occur annually. c) Timelines can be constructed in situations where some cash flows occur annually but others quarterly.

Step-by-step explanation:

The time value of money (TVM) is a fundamental financial concept that recognizes the idea that money available today is worth more than the same amount in the future. This is because money today can be invested to generate returns, creating additional value over time. TVM is crucial in financial decision-making, helping individuals and businesses assess the future worth of investments or cash flows.

In the context of the given questions, the rules of time travel are not provided, so I cannot address them specifically. However, the discussion on timelines is pertinent. Timelines in finance are meaningful even if cash flows do not occur annually. They can accommodate various payment frequencies, such as quarterly or monthly, allowing for a more accurate representation of cash flows over time. This flexibility is essential in financial modeling and decision analysis.

Understanding the time value of money is crucial for practical applications, as illustrated in the subsequent questions involving future value calculations, present value calculations, and determining investment periods. These calculations involve applying formulas such as the future value formula FV = PV * (1 + r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of periods. These formulas help quantify the impact of time on the value of money, guiding financial decision-makers in making informed choices.