Posted: April 10th, 2016

Very importantly show all steps and demonstrate a good understanding of the time value of money.

1. In two to three paragraphs, explain why the concept of present value is so important for corporate finance and is often the very first topic taught in any finance class. Do not focus your answer on explaining what present value is, instead focus on some specific reasons why you think it is important and why it is taught first in corporate finance classes before other topics are introduced. Support your answer with solid references.

2. Calculate the future value of the following:

a. $500 if invested for five years at a 7% interest rate

b. $950 if invested for three years at a 4% interest rate

c. $9900 if invested for seven years at an 2% interest rate

d. $4000 if invested for ten years with a 0.9% interest rate

3. Calculate the present value of the following:

a. $7500 to be received three years from now with a 4% Interest rate

b. $4000 to be received five years from now with a 5% interest rate

c. $1200 to received two years from now with a 12% interest rate

d. $770,000 to be received eight years from now with a 1% interest rate.

4. Suppose you are to receive a stream of annual payments (also called an annuity ) of $8000 every year for three years starting this year. The interest rate is 4%. What is the present value of these three payments?

5. Suppose you are to receive a payment of $10000 every year for three years. You are depositing these payments in a bank account that pays 2% interest. Given these three payments and this interest rate, how much will be in your bank account in three years?

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