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3 pages/β‰ˆ825 words
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5 Sources
Style:
APA
Subject:
Business & Marketing
Type:
Essay
Language:
English (U.S.)
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MS Word
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Topic:

The Time Value of Money and Financial Statement Analysis

Essay Instructions:

Order details #00034470

Business Finance, 2 pages, 5 references, Master program, APA style with the appropriate tables

Please use references that have URLs that can  be easily verified on the internet

Module 1 - Case

The Time Value of Money and Financial Statement Analysis

Case Assignment

Solving Present Value and Future Value Problems

You are the CFO (Chief Financial Officer) of ABC Golf Equipment Corporation, a small company that sells golf equipment. Mr. Hillbrandt, the new CEO (Chief Executive Officer) has a marketing background and is trying to learn more about the financial side of running a business. He wants your help and asks for an introduction to the concept of time value of money.

The value of a typical corporate bond is the present value of an annuity plus the present value of a lump sum. Thus, if an individual does not understand how to calculate the present value of a lump sum or the present value of an annuity, it is difficult to determine the value of a typical corporate bond. Thus, in this case assignment, you will work through a variety of time value of money problems to illustrate the idea to the CEO. 

The following websites include a number of formulae and financial calculators, including Present Value, Future Value, and Annuity:

Financial calculators. (2015). Calculator Soup. Retrieved from http://www(dot)calculatorsoup(dot)com/calculators/financial/

Carther, S. (2015). Calculating the present and future value of annuities. Investopedia. Retrieved from http://www(dot)investopedia(dot)com/articles/03/101503.asp

Required:

Compute and show your work for the following scenarios: 

  • Calculate the present value of the following lump sums:
    • $100,000 to be received five years from now with a 5% annual interest rate
    • $200,000 to be received 10 years from now with a 10% annual interest rate 
  • Calculate the future value of the following lump sums:
    • $100,000 if invested for five years at a 5% annual interest rate
    • $200,000 if invested for 10 years at a 10% annual interest rate
  • Calculate the present value of these ordinary annuities:
    • $100,000 to be received each year for five years with a 5% annual interest rate
    • $200,000 to be received each year for 10 years with a 10% annual interest rate
  • Calculate the future value of these ordinary annuities:
    • $100,000 if invested each year for five years at a 5% annual interest rate
    • $200,000 if invested each year for 10 years at a 10% annual interest rate
  • Calculate the present value of these perpetuities:
    • $100,000 to be received each year forever with a 5% annual interest rate
    • $200,000 to be received each year forever with a 10% annual interest rate 

Computations (use Excel).

  1. Show the computations as required above.
  2. Summarize the results in an easy to read table at the top of the spreadsheet or on a clearly labeled separate tab.

Memo (use Word).

Interpret the results from the computations and explain how the information is useful. Write a four or five paragraph memo to the CEO. Start with an introduction and end with a conclusion or recommendation. Each of the four or five paragraphs should have a heading.

Short Essay (use Word).

Do research and write a short essay to comment on the use of bonds by public corporations. The emphasis of the essay could be either

  • A discussion of different types of bonds; or
  • The use of bonds in different industries.

Start with an introduction and end with a summary or conclusion. Use headings. Don’t forget to reference your sources. Maximum length of two pages.

Assignment Expectations

Each submission should include two files: (1) An Excel file; and (2) A Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.

Essay Sample Content Preview:

The Time Value of Money and Financial Statement Analysis
Name
Course
Instructor
Date
Memo: ABC Golf Equipment Corporation
To: Mr. Hillbrandt, CEO (Chief Executive Officer)
From: The CFO (Chief Financial Officer)
Date: 5/11/2015
Subject/ Re: Time value of money concept
Introduction
This memo is meant to highlight on the concept time value of money while also providing a general overview of different scenarios relying on the concept. The time value of money highlights that money held now is more than similar amount in the future since there is a potential earning capacity. In any case, discounting cash flows to calculate the present value will be vital to valuing investments including those of bonds and stocks (Welch, 2014).
Present value and future values
The present value of the lump sum will be vital to deciding on which investments to choose andfuture obligation to pay. Comparing the two options shows that the $ 100,000, 5% at 5 year has the higher present value at $ 78,353. As such, the present value was beneficial to reflect the current value for two options with different interest rates and time. Since the future value gives the nominal value at a specified time, in future it is related to the present value. Hence both values depict opposite scenarios, with the future value dependent on the accumulation function. The capitalization of future values uses the same logic as present value, but may fail to take into account inflation (Boundless. Com, n.d.).
Ordinary annuities
Ordinary annuity is related to the identical payments at equal and regular time intervals, mostly annually (Carther, 2015). This allows the organization to plan in advance given that the identical payments are known given that the interest is as well as the time period is well known, and the calculations is the part that represents the bond price valuations (Carther, 2015). This will also provide information to make it easier to estimate rates of return. The present value of annuities was $432, 948 and $1,228,914 for option 1 and 2 respectively. The future values of the ordinary annuities are also periodic payments in a series. Since the interest rate assumption affects the future value of annuities, this will be taken into consideration when deciding between the two options at $552,560 and $3,187,480 respectively.
Present value of these perpetuities
There was an assumption that the perpetuity did no grow over time for the two options. The perpetuity payments are infinite payments unlike the annuity, which are paid for a specified time. There is no difference between the total amounts paid since the present value of the perpetuity is $ 2,000, 000 in both cases. This will be an important measure since it follows the same concepts for the dividend as well as dividend discount model.
Conclusion
The calculations on present values and cash values proved vital to choose between the two options available. In particular, the expected receipts in future and required rate of return are important components to decide on the best investment options. In any case, since the calculations were cash amounts. Overall, the ...
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