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Money has different values based on time. Money in your pocket has a current value, but money owed to you has a varying value based on how sure it is that you will receive it and when. It is possible to estimate its value. In this assignment, you will analyze the value of money on the basis of this Week’s learning.

Review Understanding The Time Value of Money to attain more information on how the value of money is based on time.

Find the following values for a lump sum assuming annual compounding:

The future value of $500 invested at 8 percent for 1 year
The future value of $500 invested at 8 percent for 5 years
The present value of $500 to be received in 1 year when the opportunity cost rate is 8 percent
The present value of $500 to be received in 5 years when the opportunity cost rate is 8 percent
Analyze present and future values and their implications for the balance sheet and the budget of an organization.
Understanding the Time Value of Money (investopedia.com)

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Sample Answer

here are the values for a lump sum assuming annual compounding:

  • The future value of $500 invested at 8 percent for 1 year:
FV = $500 * (1 + 0.08) = $540

  • The future value of $500 invested at 8 percent for 5 years:
FV = $500 * (1 + 0.08)^5 = $731.60

  • The present value of $500 to be received in 1 year when the opportunity cost rate is 8 percent:
PV = $500 / (1 + 0.08) = $462.96

  • The present value of $500 to be received in 5 years when the opportunity cost rate is 8 percent:
PV = $500 / (1 + 0.08)^5 = $310.69

The present value of money is the value of a future sum of money discounted back to the present day. The future value of money is the value of a present sum of money compounded forward to a future date.

Full Answer Section

The implications of present and future values for the balance sheet and the budget of an organization are that they can be used to estimate the future value of assets and liabilities, and to plan for future cash flows.

For example, an organization can use the present value of money to estimate the future value of a pension liability. The organization can then use this information to determine how much money it needs to set aside today to meet its future pension obligations.

Similarly, an organization can use the present value of money to plan for future cash flows. For example, the organization can use the present value of money to estimate how much revenue it needs to generate today in order to meet its future expenses.

The time value of money is an important concept for organizations to understand because it can help them to make better financial decisions. By understanding the time value of money, organizations can make sure that they are making the most of their resources and that they are planning for the future in a responsible way.

 

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