Time Value of Money Powerpoints (2).pdf

Time Value of Money Powerpoints (2).pdf - USC Dr Bemis Be...

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10/29/17 1 USC Dr. Bemis } Be able to compute the future value of an investment made today } Be able to compute the present value of cash to be received at some future date } Be able to compute the return on an investment

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10/29/17 2 } The cash flow profile should include all cash items flowing into or out of a project. Each cash flow item must be identified specifically according to the time at which this flow occurs. } Income, other benefits and expenses are identified according to their type of flow over time: Periodic cash flow items occur at specific times (e.g., engine overhaul every three years) Uniform series revenues or expenses are equal periodic amounts (e.g., property taxes, leasing costs, etc.) Continuous revenues or expenses occurring uniformly over the life of the project (e.g., savings realized by replacing obsolete equipment) } Convention in financial studies dictates that all discrete cash flows occur at the end of the period, normally at the end of the year. } To ensure that all positive and negative cash flow items are included in the analysis, and to better visualize these cash flows, it is useful to construct a cash flow diagram or table.
10/29/17 3 } When analyzing the feasibility of any investment, two principles must be observed. First, the value of a sum of money is a function of the time span between the base point of reference and the date an expenditure or the receipt of revenue will occur (e.g., the value of \$100 one year from today is not the same as \$100 today). Consequently, money has a time value , which is measured by the interest rate. Second, because of this time value of money, all comparisons must be made at a common point in time. } Interest formulas provide the mechanism for converting a cash flow at one specific time into an equivalent cash flow at another time. } Different formulas are used to compute problems involving discrete compound interest, continuously compounding interest, geometric series interest, and continuously compounding, continuous flow interest.

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10/29/17 4 }
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