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L05 Time Value of Money

# L05 Time Value of Money - Time Value of Money Present and...

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Time Value of Money Present and Future Value of a Lump  Sum Annuities Perpetuities

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Time Value Money held as cash decreases in value  over time. The time frame of investment decisions  must be examined to determine the true  value of the “payout”
Compounding The process of going from today’s value  or  present value   (PV)  of a lump sum of  cash . . . .  . . . . to the  future (FV) value  at some  forthcoming time period n periods or  years from now.

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Compounding The key is that interest is paid on the  original lump sum (the principal)  simple interest  and on the interest paid over time compound interest
Lump Sum Comparisons:  Future value Future Value-  the value of a lump sum after  it has been invested for one or more periods  of time. t r PV FV ) 1 ( * + =

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Examples  \$5,000 invested today r = 8% In one year FV = 5000 x 1.08 = \$5,400 In ten years FV = 5000 x (1.08)^10 = \$10,794.62
Future Value of a Lump Sum t r PV FV ) 1 ( * + = FV with growths from -6% to +6% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 0 2 4 6 8 10 12 14 16 18 20 Years Future Value of \$1 6% 4% 2% 0% -2% -4% -6%

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Example:  Future Value of a  Lump Sum Your bank offers a
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L05 Time Value of Money - Time Value of Money Present and...

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