Chapter 5 - The Time Value of Money

Why should we (managers) learn calculations involving the time value of money? What kind of management decisions does it help us make?

Emily Smith deposits $1,200 in her bank today. If the bank pays 4 percent simple interest, how much money will she have at the end of five years? What if the bank pays compound interest? How much of the earnings will be interest on interest?

Multiple compounding periods: Find the future value of a five-year $100,000 investment that pays 8.75 percent and that has the following compounding periods:

Yearly

Monthly.

Present value: Tracy Chapman is saving to buy a house in five years. She plans to put 20 percent down at that time, and she believes that she will need $35,000 for the down payment. If Tracy can invest in a fund that pays 9.25 percent annually, how much will she need to invest today?