Chapter_05_Presentation - 5 Introduction to Valuation: The...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
5 5 Introduction to Valuation: The Time Value of Money
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
5-2 Basic Definitions Basic Definitions Present Value – earlier money on a time line Future Value – later money on a time line Interest rate – “exchange rate” between earlier money and later money Discount rate Cost of capital (projects) Opportunity cost of capital Required return (stocks)
Background image of page 2
5-3 Future Values Future Values Suppose you invest $1000 for one year at 5% per year. What is the future value in one year? Interest = 1000(.05) = 50 Value in one year = principal + interest = 1000 + 50 = 1050 Future Value (FV) = 1000(1 + .05) = 1050 Suppose you leave the money in for another year. How much will you have two years from now? FV = 1000(1.05)(1.05) = 1000(1.05) 2 = $1102.50 The extra $2.50 is due to compounding, or “interest- on-interest” $50*5%=$2.50 If we were using simple interest, the total would be $1100.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
5-4 Future Values: General Formula Future Values: General Formula FV = PV(1 + r) t FV = future value PV = present value r = period interest rate, expressed as a decimal T = number of periods Future value interest factor = (1 + r) t Abbreviated as FVIF(r,t)
Background image of page 4
5-5 Calculator Keys Calculator Keys Texas Instruments BA-II Plus FV = future value PV = present value I/Y = period interest rate (a.k.a. r) P/Y must equal 1 for the I/Y to be the period rate Interest is entered as a percent, not a decimal N = number of periods Remember to clear the registers (CLR TVM) after each problem Set your calculator to six decimal places. Hit <2 nd > <.> and you will see “DEC=2.00”. Hit <6><ENTER> and it will change to six decimal places.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
5-6 Future Values – Example 2
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 18

Chapter_05_Presentation - 5 Introduction to Valuation: The...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online