What are the four basic present value equation parts?
The four parts are the present value (PV), the future value (FV), the discount rate (r), and the life of the investment (t).
What is compounding?
Compounding refers to the growth of a dollar amount through time via reinvestment of interest earned. It is also the process of determining the future value of an investment.
What is discounting?
Discounting is the process of determining the value today of an amount to be received in the future.
What happens to future value as you increase the length of time involved?
Future values grow (assuming a positive rate of return)
What happens to the present value as you increase the length of time involved?
present values shrink
What happens to future value if you increase the rate i?
The future value rises (assuming it's positive)
What happens to the present value if you increase the rate i?
present value falls
Why would a company be willing to take $24099 today in exchange for 100,000 in the future?
It's a reflection of the time value of money. The company gets to use the $24,099. If the company uses it wisely, it will be worth more than $100,000 in thirty years.
What are the key considerations when answering if you would be willing to pay $24099 today in exchange for $100,000 in 30 years?
The key considerations would be: (1) Is the rate of return implicit in the offer attractive relative to other, similar risk investments? and (2) How risky is the investment; i.e., how certain are we that we will actually get the $100,000? Thus, our answer
Supposed that when TMCC offered security for $24,099 the U.S. Treasury had offered an essentially identical security. Do you think it would have been higher or lower?
The Treasury security would have a somewhat higher price because the Treasury is the strongest of all borrowers.
What are the four pieces to an annuity present value?
The four pieces are the present value (PV), the periodic cash flow (C), the discount rate (r), and the number of payments, or the life of the annuity, t.
As you increase the length of time involved what happens to the present value and future values of an annuity?
Assuming positive cash flows, both the present and the future values will rise.
What happens to the present value of an annuity if you increase the rate i?
Assuming positive cash flows, the present value will fall
What happens to the future value of an annuity if you increase the rate i?
Assuming positive cash flows, the future value will rise
If you were an athlete negotiating a contract, would you want a big signing bonus payable immediately and smaller payments in the future or vice versa? Team perspective?
If the total money is fixed, you want as much as possible as soon as possible.
The Team wants the opposite.
Suppose two athletes sign 10 year contracts for 80 million. In one case, were told that the $80 million will be paid in 10 equal installments. In the other case, were told that 80 million will be paid in 10 installments, but the installments will increase
The better deal is the one with equal installments.