Answer all questions in this workbook. Be sure to read the introductory text on tabs 1 and 3 as well as these instructions.
Keep in mind that the focus of this project is corporate finance. The information generated by the accounting system is important; but in finance, decisions are driven by an analysis of cash flows rather than profits.
Tab 1 contains a series of exercises on the concept of the time value of money. These exercises do not relate directly to the issues facing LGI.
Tab 2 focuses on the concept of annuities. The first few questions do not pertain specifically to LGI; the latter questions do.
Tab 3 pertains to whether LGI should acquire new assets that may enhance the company’s productivity and thus improve financial performance.
Tab 1 – TVM
1. Briefly explain the meaning of the term “present value” in your own words.
Present value simply means the current value or worth of a product
2. Briefly explain the meaning of the term “future value” in your own words.
Present value is the value of money or product in more than a year
3. What is the future value in five years of $1,500 invested at an interest rate of 4.95%?
4. What is the future value of a single payment with the following characteristics?
5. What is the present value of $65,000 in six years, if the relevant interest rate is 8.1%?
6. What is the present value of a single payment with the following characteristics?
7. The present value of a payment is $4000. The future value of that payment in five years will be $4800. What is the annual rate of return?
8. What is the annual rate of return of a single payment with the following characteristics?
Time value of money (TVM) exercises
There are five variables in TVM calculations: present value, number of periods, rate of return, regular payments, and future value. If four of the variables are known, then the fifth can be calculated using algebra, a financial calculator, or a computer program such as Excel.
Excel functions for the five variables are as follows:
NPER—number of periods
RATE—rate of return
Tab 2 – Annuities
1. How many years would be required to pay off a loan with the following characteristics?
2. What is the annual payment required to pay off a loan with the following characteristics?
3. Why is FV not part of the calculations for either question 1 or question 2?
4. At what annual rate of interest is a loan with the following characteristics?
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