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# LN_5 - Time Value of Money Question You are offered two...

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1 Time Value of Money Question You are offered two options to receive a cash payment. Option A: \$100 today Prof. Q. Ma HADM 2222: Time Value of Money 0 Option B: \$107 in future year t Which one is more valuable to you? General Question Earlier time Later time Prof. Q. Ma HADM 2222: Time Value of Money 1 Time Line \$\$\$\$ (PV) \$\$\$\$\$\$ (FV) Learning Objectives Be able to compute The FV of a cash payment made today The PV of cash at some future date The return (r) on an investment The number of periods (T) that equates a PV Prof. Q. Ma HADM 2222: Time Value of Money 2 The number of periods (T) that equates a PV and an FV given an interest rate (r) Be able to use a financial calculator to solve TVM problems Future Value Suppose you invest \$100 for one year at 6% per year. What do you have in one year? Interest = 100 * .06 = 6 Value in one year = principal + interest = 100 + 6 Future Value (FV) = 100 * (1 + .06) Prof. Q. Ma HADM 2222: Time Value of Money 3 Suppose you leave the money in for another year. How much will you have two years from now? FV = 106 + 106 * .06 = 106 * (1+.06) FV = 100 * (1+.06) 2 Future Value – General Formula FV = PV (1 + r) T FV = future value PV t l Prof. Q. Ma HADM 2222: Time Value of Money 4 PV = present value r = period interest rate, expressed as a decimal T = number of periods Definitions Earlier time Later time Time Line PV FV Prof. Q. Ma HADM 2222: Time Value of Money 5 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; required return Cost of capital; opportunity cost of capital

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