Question

Question 2. (4 marks) It has been stated that 'Time has value.' What does this mean when we are evaluating a series of cash flows? Problems Please note: show the formula you are using and your work! Use and show time lines. Marks will be assigned for the presentation of the time lines and the relevant information. Problem 1. (8 marks) Your friend is talking to you about one of their investments. They stated that they invested in 1- Can't-Believe-It a few years ago. Yesterday, your friend received a cheque from the investment for $5,000. According to the company's annual report and forecast, the company expects the amount of the cash flow to increase or grow at 15 percent for the next 5 years and then to grow at 2 percent forever. (Include a time line that contains the relevant information for each problem.) a. If you require a 15 percent return on your investment, what is the value of this investment today? (4 marks) b. If the first cash flow of $5,000 occurs today, what is the value of the investment today? (4 marks)

Answer 1

Question 2)
Time has value, because if we would have that money we would have invested it somewhere else and could have earned a risk free rate of interest from it at least. So the money we are holding today is gonna be of more worth as we increase in time.
In case of cash flow, the cash flows that arrive early holds more value than the cash flows which arrives later in time if both the flows have same money amount involved.