1 A B D Time Value of Money - Future Value Annuity 2 Number of Years 3 Rate of Return 4 Payment 5 $0.00 E F A B D E 1 Time Value of Money - Present Value of Lump Sum 2 Rate 3 Years 4 Initial Investment 5 $0.00 FL FL Rate A B E Time Value of Money - Future Value of Lump Sum Years Initial Investment $0.00 Assumptions to consider: 10-year bond 8% coupon Priced at a discount: $95 Discount rate is 9% 2 3 Initial Investment 5 Annual Cash Inflows Discount Rate Number of Years Salvage Value 9 0 1 2 3 4 Initial Investment 5 Annual Cash Inflows 6 Discount Rate 7 Number of Years 8 Salvage Value 9 0 1 2 3 4 Initial Investment 5 Annual Cash Inflows 6 Discount Rate 7 Number of Years 8 Principal Returned 9 0 NPV = $0 NPV = $0 NPV = $0 Net Pr F J K L M N P G H Net Present Value (NPV) Calculator Building D R Year 1 2 3 4 5 6 7 8 9 10 Cash Flows $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 11 12 13 14 15 16 17 18 19 20 Cash Flows $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Equipment Year 1 2 3 4 5 6 7 8 9 10 Cash Flows $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 11 12 13 14 15 16 17 18 19 20 Cash Flows $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Bonds Year Cash Flows 1 2 $0 $0 3 $0 4 $0 5 6 7 8 9 10 $0 $0 $0 $0 $0 $0 S 0 A B C D E F G H J K L M N P Time Value of Money - Monthly Compounding Rate of Return Initial Investment Year 1 Month 1 2 3 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 2 Month 1 2 3 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 3 Month 1 2 3 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 4 Month 1 2 3 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 5 Month 1 2 3 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 6 Month 1 2 3 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 7 Month 1 2 3 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 8 Month Interest 1 2 3 4 5 6 7 8 9 10 11 12 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 8 Month 1 2 3 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 9 Month 1 2 3 st 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Year 10 Month 1 2 3 4 5 6 7 8 9 10 11 12 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Time Value of Money - Annual Compounding IVI Rate of Return Year 1 2 3 4 5 6 Initial Investment 7 8 9 10 Interest $0 $0 $0 $0 $0 $0 $0 $0 $0 Investment Value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Time Value of Money - Present Value Annuity Number of Years Rate of Return Payment $0.00 FIN 320 Final Project Financial Assumptions When a business needs to invest, it's important to look at financial options. This is true for simple purchases, such as a new piece of equipment, and for complex purchases, such as a new business. Business leaders must estimate cash flows from an investment and use the net present value (NPV) method to figure out if the investment is worthwhile. Financial Option 1: Purchase a $10 Million Building Rationale for investment: The business is considering environmental, social, and corporate governance (ESG) factors as part of its investment in a new building for its headquarters. The building itself will be a Leadership in Energy and Environmental Design (LEED)-certified building. However, the new site has a large, inactive gas station that previously sold both gasoline and diesel fuel. The new site also has a large repair facility that was used for deliveries and tractor-trailer trucks for more than 50 years. Some restoration was performed on the site, but the previous owner ran out of funds before they could bring the site up to LEED standards. Four large fuel tanks remain on the site that will also need to be addressed per LEED standards. Assumptions to consider: $10 million cash purchase Building generates additional net profits after tax of $1.25 million per year 20-year expected useful life of building Salvage value: $1.5 million Discount rate is 10% Financial Option 2: Lease of $25 Million in Equipment Rationale for investment: The business's equipment is efficient, but it uses a lot of electricity. The production line also creates significant waste material, including waste plastics. The business is looking into leasing newer, more environmentally friendly equipment that will still allow it to be at least as efficient in production as it is now. Assumptions to consider: Annual cash flows generated with equipment: $4 million Discount rate is 12% 15-year useful life There is no salvage value Financial Option 3: $30 Million Investment in Bonds Rationale for investment: The business is offering these bonds for sale contracts with another business in China to assemble computer parts. The Chinese business has used child labor in the past, but it claims it has stopped this practice. However, the U.S. business selling these bonds has not investigated to verify whether these claims are true.