When the Genesis Energy and Sensible Essential teams held their weekly meeting,

Question

When the Genesis Energy and Sensible Essential teams held their weekly meeting, the time value of money and its applicability yielded an extremely stimulating discussion. However, most of the team members from Genesis Energy were very perplexed. Sensible Essentials decided the most expedient way to demonstrate how interest rates as well as time impact the value of money was to use examples. You have been asked to prepare a report analyzing your findings of the three example calculations listed below.

In this assignment, you will do the following:

Calculate the future value of $100,000 ten years from now based on the following annual interest rates:

2%

5%

8%

10%

Calculate the present value of a stream of cash flows based on a discount rate of 8%. Annual cash flow is as follows:

Year 1 = $100,000

Year 2 = $150,000

Year 3 = $200,000

Year 4 = $200,000

Year 5 = $150,000

Years 6-10 = $100,000

Calculate the present value of the cash flow stream in problem 2 with the following interest rates:

Year 1 = 8%

Year 2 = 6%

Year 3 = 10%

Year 4 = 4%

Year 5 = 6%

Years 6-10 = 4

Perform your calculations in an Excel spreadsheet. Copy the calculations in a Word document. In addition, write a 2- to 3-page executive summary in Word format. Your summary should reflect a proper analysis of your findings, including a comparison and contrast of data. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M2_A2.doc.

Explanation / Answer

(1) Computation of future value of $ 100,000 for 10 years with different interest rates.We have,

Future value of money (FVn ) = Present value (PV) x ( 1 + r)n

Where;

n = Number of years = 10

r = interest rates

(2) Computation of present value of a stream of cash flows based on a discount rate of 8%.We have,

   Present Value = Future value / (1+r)n

(3) Computation of present value of a stream of cash flows based on different discount rate.We have,

Conclusion: The future value or compounded value of an investment show the how present value shall increase in certain period and certain rate of interest.Future value is totally depends on the rate of interest.If rate of interest is more,than, future value shall be more and vice versa. In this asignment, future value is different due to different time period.

Present value is calculated future value is divided by present value factor. The important factor in present value is stream of Future cash flow and rate of interest and time period. If all or any two or any one factor increase or decrease,than, present value is also increase or decrease.In this assignment, we see the stream of future cash flow increase of decrease with constant time period and rate of interest.Present value is also increase or decrease.If the stream of future cash flow and rate of intereast are increase or decrease.The directly effect on present value of cash flow of that movment.

Interest Rates(%) Number of years Present value ($) Future value factor Future Value ($) 2 10 100,000 (1 +0.02)10 = 1.219 121,900 5 10 100,000 (1 +0.05)10 =1.629 162,900 8 10 100,000 (1 +0.08)10 = 2.159 215,900 10 10 100,000 (1 +0.10)10 = 2.594 259,400

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