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Copyright © D. Stangeland1Live Lab 1:Time Value of MoneyFIN 2200 – Corporate FinanceDr. David A. Stangeland
Copyright © D. Stangeland2Formulas)1(10rCPV+=FV1=C0(1+r )nn0r)(1CPV+=PV=C1rg()11+g1+rngrCPV10=[]nnngrgrCFV)1()1(1++=rCPV0=+=n0r)(111rCPV[]1r)(1rCFVnn+=Also see last slideFVn=C0(1+r )n
Example Slide 11.Assuming r=7%1.Find the value 5 years from now of $60,000 that is received in 15years from now.2.Find the value 10 years from now of $100,000 invested now.2.Assume the inflation rate is 3% per year and you want a cashflow to give the same purchasing power as $100,000 gives today.1.What must be your nominal cash flow if it is to be received in oneyear?2.What must be your nominal cash flow if it is to be received in 10years?3.Consider the amount received in 1.2 above and continue toassume r=7% and inflation = 3%.1.What is the purchasing power (expressed in todays dollars) of theamount received in 1.2 above?2.What is the present value of this amount?3.Why are these amounts different?4.What is the real rate of return?
Copyright © D. Stangeland4Example Slide 2oYour father loaned you $50,000 as so you couldpursue your MBA studies without working. You willrepay the loan over 10 years of annual payments (1stpayment in one year).nWhat would be your annual payment to repay theloan if your father charged you an effective annualrate ofo0% …o4% …nIf you repay him in equal amounts of $7,500 each ofthe next 10 years, what rate of interest are you, ineffect, paying him?
5oYou have won at Toto Lotek (a PolishLottery) and are offered cash payments of1 million PLN per year for the next 20 years(first payment is one year from today). Ifyour opportunity cost of capital for PLNcash flows is 10%, how much as a singlelump sum would you be willing to receivetoday in exchange for the 20 yearly cashflows?Example Slide 3
Copyright © D. Stangeland6oYou have just donated $10 million to theAsper School of Business and your donationstipulates that ASB must only spend 2% ofthe beginning-of-year principal balance ofthe endowment each year. The endowmentearns 5% per year.nWhat would be the amounts that the ASB canspend in year 1, 2, and 3?n

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