Chapter 5 notes formula.docx - CHAPTER 5 INTRODUCTION TO VALUATION THE TIME VALUE OF MONEY(FORMULAS Key Concepts and Skills Determine the future value

Chapter 5 notes formula.docx - CHAPTER 5 INTRODUCTION TO...

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CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY (FORMULAS) Key Concepts and Skills Determine the future value of an investment made today Determine the present value of cash to be received at a future date Find the return on an investment Calculate how long it takes for an investment to reach a desired value Chapter Outline Future Value and Compounding Present Value and Discounting More about Present and Future Values 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 Future Value Suppose you invest $1,000 for one year at 5% per year. What is the future value in one year? Suppose you leave the money in for another year. How much will you have two years from now?
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