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)
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Future Value – General Formula
FV = PV (1 + r)
T
FV = future value
PV
t
l
Prof. Q. Ma
HADM 2222: Time Value of Money
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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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