Suppose your rich uncle offers you a choice of generous gifts: $10,000 in cash today or $1,200 in cash at the end of each of the next ten years, totaling $12,000. Which gift should you take?
As a student in this course, you previously completed a course in the principles of business finance. That course introduced you to the concept of time-value-of-money (TVM), including the concepts of present value and future value. TVM expresses the perception that a dollar is worth more in your hand today than it is if you receive it the future. For example, you can use this concept to decide how much interest you must earn on an investment of a given amount of money in hand today in order for you to perceive that sum as having a value equal to another specified amount to be received, say, five years from today. You can also use this concept to determine how much less valuable to you a specified amount of money is if, instead of receiving it today, you receive it in, say, five years without the opportunity to invest it during that period.
This topic explores TVM concepts and how managers use them in making investment decisions. Examples of such decisions include whether to expand or replace a fleet of trucks, build a new manufacturing facility, launch a new product line (or discontinue an aging product line), acquire a competitor firm, or sell an existing division of a business.
By the way, if today’s market interest rates exceed approximately 3.5 percent, tell your uncle that you prefer the $10,000 in cash today to the ten-year $1,200 annuity, even if you have no reason to expect him to renege on his gift before the final $1,200 payment. That is, the immediate gift of $10,000 has a greater present value than the $1,200 annuity if you can invest either at a rate of return exceeding 3.46 percent. If, on the other hand, market interest rates are less than 3.46 percent, you should take the annuity.
By completing this assignment, you will learn how to use present value concepts to estimate the fair value of a business’ outstanding borrowings in the form of bonds or notes issued to finance its long-term investments.
Please use the file entitled Topic5bTemplate for this assignment. It is located in the Content section of the course, under Course Resources, Assignment Templates. Once you have downloaded the file, complete all the necessary work, and rename the file with your Last and First name. For example, if your name is John Doe, then you would rename the file as Topic5bDoeJohn. Once you have done this, you must upload the completed assignment to the appropriate assignment location of this course.