Lecture - Time Value, PV, FV, NPV

# Lecture - Time Value, PV, FV, NPV - Time Value PV FV NPV...

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Time Value, PV, FV, NPV 4ET3-Winter 2015 1

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Time Value of Money Important Principle: Money Has a Time Value. The concept of time value of money a dollar received today, other things being the same, is worth more than a dollar received a year from now, underlies many financial decisions faced in business. 2
Obviously, \$10,000 today . You already recognize that there is TIME VALUE TO MONEY !! The Interest Rate Which would you prefer -- \$10,000 today or \$10,000 in 5 years ? 3

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TIME allows you the opportunity to postpone consumption and earn INTEREST . Why TIME? Why is TIME such an important element in your decision? 4
Types of Interest Compound Interest Interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent). Simple Interest Interest paid (earned) on only the original amount, or principal, borrowed (lent). 5

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6 Future Value of Single Cash Flow n i PV FV ) 1 (
SI = P 0 ( i )( n ) = \$1,000 ( .07 )( 2 ) = \$140 Simple Interest Example Assume that you deposit \$1,000 in an account earning 7% simple interest for 2 years. What is the accumulated interest at the end of the 2nd year? 7

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FV = P 0 + SI = \$1,000 + \$140 = \$1,140 Future Value is the value at some future time of a present amount of money, or a series of payments, evaluated at a given interest rate. Simple Interest (FV) What is the Future Value ( FV ) of the deposit? 8
The Present Value is simply the \$1,000 you originally deposited. That is the value today! Present Value is the current value of a future amount of money, or a series of payments, evaluated at a given interest rate.

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