Address the following questions in your own words (i.e. avoidplagorism)

Module 5:

- The basic value equation (Present Value) has four parts. Whatare these parts? Briefly defined each part.

- What is compounding? What is discounting?

- Take a look back at Example 5.7. Is it deceptive advertising?Is it unethical to advertise a future value like this without adisclaimer? Briefly explan your answer.

Module 6:

- As you increase the length of time involved, what happened tothe present value of an annuity? Briefly explan your answer. Whathappens to the future value? Briefly explan your answer.

- If you were an athlete negotiating a contract, would you wanta big signing bonus payable immediately and smaller payments in thefuture, or vice versa? Briefly explan your answer. Will you changeyour answer if the question was related to the team rather thanjust you? (i.e. consider the team’s perspective)? Briefly explanyour answer.

- What happens to the future value of perpetuity if interestrates increase? Briefly explan your answer. What if interest ratesdecrease? Briefly explan your answer.

EXAMPLE 5.7

Deceptive Advertising?

Businesses sometimes advertise that you should “Come try ourproduct. If you do, we’ll give you $100 just for coming by!” If youread the fine print, what you find out is that they will give you asavings certificate that will pay you $100 in 25 years or so. Ifthe going interest rate on such certificates is 10 percent peryear, how much are they really giving you today?

What you’re actually getting is the present value of $100 to bepaid in 25 years. If the discount rate is 10 percent per year, thenthe discount factor is:

1/1.1²⁵ = 1/10.8347 =.0923

This tells you that a dollar in 25 years is worth a little morethan nine cents today, assuming a 10 percent discount rate. Giventhis, the promotion is actually paying you about .0923 × $100 =$9.23. Maybe this is enough to draw customers, but it’s not$100.