,FIN3704 Assignment 2 (COMPLETE ANSWERS) Semester
1 2025 – DUE 23 April 2025; 100% trusted, comprehensive
and complete reliable solution with clear explanation
Question 1 (6 marks)
1.1 What is the principle behind the Time Value of Money,
and why is it important in financial decision-making?
ANSWER
The Time Value of Money (TVM) is a fundamental financial
principle that states:
“A sum of money today is worth more than the same sum at
a future date due to its potential earning capacity.”
This core concept assumes that money can earn interest or
returns over time, which means that R1 today is more valuable
than R1 tomorrow because today's money can be invested to
generate additional income.
Why It’s Important in Financial Decision-Making
1. Investment Evaluation
TVM helps compare the present value of cash inflows
and outflows, allowing businesses to assess whether an
investment is worthwhile (e.g., using NPV or IRR).
, 2. Loan and Mortgage Planning
It allows individuals and institutions to determine fair loan
repayments over time, calculating how much future
payments are worth in today’s terms.
3. Retirement and Savings Planning
Helps calculate how much needs to be saved today to
achieve a future financial goal.
4. Valuation of Financial Assets
TVM is used in valuing stocks, bonds, annuities, and other
financial instruments.
5. Opportunity Cost Consideration
It emphasizes the opportunity cost of tying money up in
one investment rather than another potentially more
profitable option.
Example:
If you have R1,000 now and you can invest it at 10% annual
interest, in one year you will have R1,100. So, receiving R1,100
in a year is only worth R1,000 today — that’s the essence of
TVM.
1.2 Explain the difference between present value and future
value. How are they related?
ANSWER
1 2025 – DUE 23 April 2025; 100% trusted, comprehensive
and complete reliable solution with clear explanation
Question 1 (6 marks)
1.1 What is the principle behind the Time Value of Money,
and why is it important in financial decision-making?
ANSWER
The Time Value of Money (TVM) is a fundamental financial
principle that states:
“A sum of money today is worth more than the same sum at
a future date due to its potential earning capacity.”
This core concept assumes that money can earn interest or
returns over time, which means that R1 today is more valuable
than R1 tomorrow because today's money can be invested to
generate additional income.
Why It’s Important in Financial Decision-Making
1. Investment Evaluation
TVM helps compare the present value of cash inflows
and outflows, allowing businesses to assess whether an
investment is worthwhile (e.g., using NPV or IRR).
, 2. Loan and Mortgage Planning
It allows individuals and institutions to determine fair loan
repayments over time, calculating how much future
payments are worth in today’s terms.
3. Retirement and Savings Planning
Helps calculate how much needs to be saved today to
achieve a future financial goal.
4. Valuation of Financial Assets
TVM is used in valuing stocks, bonds, annuities, and other
financial instruments.
5. Opportunity Cost Consideration
It emphasizes the opportunity cost of tying money up in
one investment rather than another potentially more
profitable option.
Example:
If you have R1,000 now and you can invest it at 10% annual
interest, in one year you will have R1,100. So, receiving R1,100
in a year is only worth R1,000 today — that’s the essence of
TVM.
1.2 Explain the difference between present value and future
value. How are they related?
ANSWER
