# Time value of money (TVM)

OVERVIEW: Respond to three questions and solve three computational problems about the time value of money (TMV) as it applies to a single cash flow. Time value of money (TVM) is the foundation of mathematical finance. It is important to be able to demonstrate how the TVM concept can be applied to corporate finance, as well as to personal finances. In addition, knowing how to apply various technical terms used in finance, such as discount rate, present value, and future value is a useful skill. RESOURCES: Weaver, S. C., & Weston, J. F. (2001). Finance and accounting for nonfinancial managers.

New York, NY: McGraw-Hill. Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: American Management Association. Cornett, M., Adair, Y., & Nofsinger, J. (2014). M: Finance (2nd ed.). New York, NY: McGraw-Hill. INSTRUCTIONS: Respond to the questions and complete the problems. Questions: In a Word document, respond to the following. Number your responses 1–3. Explain the concept of cash flow in corporate finance. Explain how present value and future values are related. Explain how present values are affected by changes in interest rates. Use references to support your responses as needed. Be sure to cite all references using the correct APA style.

Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills. Problems: In either a Word document or Excel spreadsheet, complete the following problems. You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas. In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receiving credit for your answer.

Unless otherwise directed, assume annual compounding periods in the computational problems. If you deposited \$250 in your savings account today, and the bank pays 4 percent interest per year, how much would you have in your savings account after 9 years? Recalculate the account balance using a 6 percent interest rate and a 7 percent interest rate. A \$450 deposit earns 6 percent interest in the first year, 3 percent interest in the second year, and 7 percent interest in the third year. What is the future value at the end of the third year? What is the annual rate of return for an \$8,000 investment if in five years it grows to \$12,500?Assuming the growth occurred in six years and then eight years, recalculate the rate of return for these two scenarios.

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