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168 PART 2 Important Financial Concepts
S UMMARY
FOCUS ON VALUE
Review Questions
4–15 How can you determine the size of the equal annual end-of-period deposits
necessary to accumulate a certain future sum at the end of a specified future
period at a given annual interest rate?
4–16 Describe the procedure used to amortize a loan into a series of equal periodic
payments.
4–17 Which present value interest factors would be used to find (a) the growth
rate associated with a series of cash flows and (b) the interest rate associated
with an equal-payment loan?
4–18 How can you determine the unknown number of periods when you know
the present and future values—single amount or annuity—and the applicable
rate of interest?
Time value of money is an important tool that financial managers and other market participants
use to assess the impact of proposed actions. Because firms have long lives and their
important decisions affect their long-term cash flows, the effective application of timevalue-of-money
techniques is extremely important. Time value techniques enable financial
managers to evaluate cash flows occurring at different times in order to combine, compare,
and evaluate them and link them to the firm’s overall goal of share price maximization. It
will become clear in Chapters 6 and 7 that the application of time value techniques is a key
part of the value determination process. Using them, we can measure the firm’s value and
evaluate the impact that various events and decisions might have on it. Clearly, an understanding
of time-value-of-money techniques and an ability to apply them are needed in
order to make intelligent value-creating decisions.
REVIEW OF LEARNING GOALS
Discuss the role of time value in finance, the use
LG1
of computational tools, and the basic patterns
of cash flow. Financial managers and investors use
time-value-of-money techniques when assessing the
value of the expected cash flow streams associated
with investment alternatives. Alternatives can be assessed
by either compounding to find future value or
discounting to find present value. Because they are
at time zero when making decisions, financial man-
agers rely primarily on present value techniques.
Financial tables, financial calculators, and computers
and spreadsheets can streamline the application
of time value techniques. The cash flow of a firm
can be described by its pattern—single amount, annuity,
or mixed stream.
LG2
Understand the concepts of future and present
value, their calculation for single amounts, and