FIN-515-Managerial Finance Week 2_TVM _Discussion_Question_2_Answer

Apr 24th, 2015
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FIN-515-Managerial Finance Week 2_TVM _Discussion_Question_2_Answer

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TVM (graded) Discuss why business managers would want to express future cash flows in today's dollar. How would this facilitate business decision making?How does present value compare with future value?The present value of a dollar is less than the future value of a dollar. You could use the dollar you have now and invest in something so that at a given point in the future it will be more. The future value depends on the interest rate being received and the number of times it will be compounded over the life of the investment. The higher the rate and the more times it's compounded, the higher the future value of the dollar will be. The difference between present value and future value depend on multiple variables such as interest charged or received and the term of the loan or borrowing. For instance, if you have an investment today of $100K that over 20 years will provide a rate of return of 5% compounded annually, the future value of your investment is just under $163K. This allows you to plan which investments are best suited to your operation. The book utilizes terms for each value to breakdown the meaning of both present and future value. For example, compounding is said to be the process of determining the future value (FV) of a cash flow or a series of cash flows. The compounded amount, or future value, is equal to the beginning amount plus interest earned.From a present value perspective, discounting is the process of finding the present value (PV) of a futur

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