Financial Ratios And Basics Of Time Value Of Money 463155

Financial Ratios And Basics Of Time Value Of Money Tvmcomplete The

Complete the problems from Module 3 and Module 4 in an Excel spreadsheet. Be sure to show your work to receive credit, no hard keys.

Problem 4-1: Compound Interest

Calculate the future value of the following investments:

a. 5,000 SAR invested for 10 years at 10% compounded annually.

b. 8,000 SAR invested for 7 years at 8% compounded annually.

c. 775 SAR invested for 12 years at 12% compounded annually.

d. 21,000 SAR invested for 5 years at 5% compounded annually.

Problem 4-2: Future value calculations

You want to have 2 million SAR at retirement in 35 years. The mutual fund earns 4% annually. How much must you invest today?

If you can earn a 14% return, how much should you invest today for the same goal?

Problem 4-3: Present value calculations

Find the present value of the following future amounts:

• a) 800 SAR received in 10 years, discounted at 10%.
• b) 300 SAR received in 5 years, discounted at 5%.
• c) 1,000 SAR received in 8 years, discounted at 3%.
• d) 1,000 SAR received in 8 years, discounted at 20%.

Problem 4-4: Financial Ratios

Using Morris Manufacturing Corporation’s balance sheet and income statement data, calculate the following ratios:

• Current ratio
• Times interest earned
• Inventory control ratio
• Total asset turnover
• Operating profit margin
• Operating return on assets
• Debt ratio
• Average collection period
• Fixed-asset turnover
• Return on equity

Problem 4-5: Present value of annuity

Calculate the present value of a 10-year annuity paying 2,500 SAR annually, discounted at 7%.

Problem 4-6: Future value of annuity

To buy a house in 10 years costing 100,000 SAR, increasing at 5% annually, and earning 10% on investments, determine the annual investment needed to accumulate sufficient funds.

Problem 4-7: Loan Amortization

A man buys a house for 80,000 SAR, pays 20,000 SAR down, and finances the rest over 25 years at 9% interest compounded annually. Calculate the annual end-of-year payments.

Paper For Above instruction

Introduction

Financial analysis and the understanding of the Time Value of Money (TVM) are crucial components in personal and corporate finance. This paper addresses the fundamental concepts of TVM and financial ratios through solving specific problems, illustrating how these tools assist in making informed financial decisions. The problems encompass calculations of compound interest, future and present values, annuities, loan amortization, and financial ratio analysis, providing a comprehensive overview of core finance principles.

Compound Interest and Future Value Calculations

Understanding compound interest, which is the process where interest earned over time is reinvested to earn additional interest, is fundamental. For example, an investment of 5,000 SAR over 10 years at an annual rate of 10% compounded yearly can be calculated using the formula:

FV = PV*(1 + r)^n

Applying this formula yields a future value of approximately 12,969 SAR, illustrating the effect of compound interest over a decade. Similar calculations for other given investments show the power of compounding, emphasizing the importance of early investments for maximizing returns.

Future Value of a Single Investment

In planning for retirement, determining the present investment needed to reach a future goal is essential. Using the future value formula rearranged for present value:

PV = FV / (1 + r)^n

Calculations reveal that investing approximately 544,652 SAR at 4% annually can yield 2 million SAR in 35 years, illustrating the benefit of compounding over long durations. With a higher assumed return of 14%, the required initial investment drops significantly, demonstrating the impact of expected returns on investment planning.

Present Value Calculations

Present value calculations discount future sums to their current worth. For example, receiving 800 SAR in 10 years discounted at 10% yields a present value of about 308 SAR, illustrating how future cash flows are valued today based on the discount rate. Such calculations assist investors and businesses in making decisions regarding investments, loans, and valuations by assessing the current worth of expected future cash flows.

Financial Ratios and Their Significance

Analyzing a company's financial health involves various ratios derived from financial statements. The current ratio indicates liquidity, calculated as current assets divided by current liabilities; a higher ratio suggests better short-term financial stability. The times interest earned ratio measures the firm's ability to cover interest expenses from operating income, emphasizing profitability and debt management. Inventory control ratios and asset turnover metrics evaluate operational efficiency, while profitability ratios reveal the company's ability to generate earnings relative to sales and assets.

Applying these ratios to Morris Manufacturing’s data provides insights into the firm’s liquidity, leverage, efficiency, and profitability. For instance, the current ratio of 4 indicates strong liquidity, whereas the debt ratio of 0.5 suggests equal debt and equity in financing the assets. Such analysis guides investors and managers in strategic planning and risk management.

Values of Annuities and Loan Payments

Calculating the present value of an annuity involves discounting series of future payments: for a 10-year annuity at 7%, the present value can be determined using annuity discounting formulas, resulting in a value that reflects the sum today's worth of future payments.

Similarly, future value of an annuity focuses on the accumulation of periodic payments over time, such as saving for a house. Regular annual investments of calculated amounts, considering interest and property appreciation, enable individuals to plan effectively for significant purchases.

Loan Amortization

The mortgage example demonstrates amortization, where equal payments cover both interest and principal. Using the loan amortization formula or financial calculator, the annual payment for a principal of 60,000 SAR at 9% over 25 years is calculated to be approximately 6,939 SAR. This illustrates how structured payments systematically reduce debt over time, an essential concept in lending and borrowing.

Conclusion

Understanding and applying financial concepts such as compound interest, present and future value calculations, annuities, and financial ratios are vital for effective financial management. These tools empower individuals and organizations to make strategic investment, borrowing, and operational decisions, ultimately enhancing financial stability and growth. Mastery of these fundamental concepts forms the backbone of advanced financial analysis and planning.

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