lecture04 - Introduction to Valuation The Time Value of...

Info icon This preview shows pages 1–9. Sign up to view the full content.

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

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

View Full Document Right Arrow Icon
2 Key Concepts and Skills We will compute the future value of an investment made today the present value of cash to be received at some future date the return on an investment the number of periods that equates a present value and a future value given an interest rate We will use a financial calculator and a spreadsheet to solve time value of money problems
Image of page 2
3 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 Opportunity cost of capital Required return
Image of page 3

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

View Full Document Right Arrow Icon
4 Future Values Suppose you invest $1,000 for one year at 5% per year. What is the future value in one year? Interest = 1,000(.05) = 50 Value in one year = principal + interest = 1,000 + 50 = 1,050 Future Value (FV) = 1,000(1 + .05) = 1,050 Suppose you leave the money in for another year. How much will you have two years from now? FV = 1,000(1.05)(1.05) = 1,000(1.05) 2 = 1,102.50
Image of page 4
5 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
Image of page 5

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

View Full Document Right Arrow Icon
6 Effects of Compounding Simple interest Compound interest Consider the previous example FV with simple interest = 1,000 + 50 + 50 = 1,100 FV with compound interest = 1,102.50 The extra 2.50 comes from the interest of . 05(50) = 2.50 earned on the first interest payment
Image of page 6
7 Calculator Keys Texas Instruments BA-II Plus FV = future value PV = present value I/Y = period interest rate P/Y must equal 1 for the I/Y to be the period rate Interest is entered as number of percent, not a decimal N = number of periods Remember to clear the registers (CLR TVM) after each problem Other calculators are similar in format
Image of page 7

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

View Full Document Right Arrow Icon
8 Future Values – Example 2 Suppose you invest the $1,000 from the previous example for 5 years. How much would you have? FV = 1,000(1.05) 5 = 1,276.28 5 N; 5 I/Y; -1,000 PV CPT FV = 1,276.28 Note the sign convention on the calculator: Cash outflows are negative and inflows are positive.
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern