Instructions

Instructions

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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

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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%?

($1,909.87)

4. What is the future value of a single payment with the following characteristics?

PV

$950

-$1,302.47

NPER

6

years

RATE

5.4%

5. What is the present value of $65,000 in six years, if the relevant interest rate is 8.1%?

($40,734.20)

6. What is the present value of a single payment with the following characteristics?

NPER

11

years

RATE

5.05%

FV

$10,000

($5,816.25)

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?

4%

8. What is the annual rate of return of a single payment with the following characteristics?

PV

$1,000

NPER

15

years

FV

$10,000

17%

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:

PV—present value

NPER—number of periods

RATE—rate of return

PMT—regular payments

FV—future value

Tab 2 – Annuities

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1. How many years would be required to pay off a loan with the following characteristics?

PV

$11,500

RATE

10.6%

PMT

$1,600

(annual payments)

14.2427882206

2. What is the annual payment required to pay off a loan with the following characteristics?

PV

$14,700

RATE

10.0%

NPER

10

years

($1,537.87)

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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