1Time Value of Money QuestionYou are offered two options to receive a cash payment. Option A: $100 todayProf. Q. MaHADM 2222: Time Value of Money0Option B: $107 in future year tWhich one is more valuable to you?General QuestionEarlier timeLater timeProf. Q. MaHADM 2222: Time Value of Money1Time Line$$$$ (PV)$$$$$$ (FV)Learning ObjectivesBe able to computeThe FV of a cash payment made todayThe PV of cash at some future dateThe return (r) on an investmentThe number of periods (T) that equates a PVProf. Q. MaHADM 2222: Time Value of Money2The 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 problemsFuture ValueSuppose you invest $100 for one year at 6% per year. What do you have in one year?Interest = 100 * .06 = 6Value in one year = principal + interest = 100 + 6Future Value (FV) = 100 * (1 + .06)Prof. Q. MaHADM 2222: Time Value of Money3Suppose 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)2Future Value – General FormulaFV = PV (1 + r)TFV = future valuePVtlProf. Q. MaHADM 2222: Time Value of Money4PV = present valuer = period interest rate, expressed as a decimalT = number of periodsDefinitionsEarlier timeLater timeTime LinePVFVProf. Q. MaHADM 2222: Time Value of Money5Present Value – earlier money on a time lineFuture Value – later money on a time lineInterest rate – “exchange rate” between earlier money and later moneyDiscount rate; required returnCost of capital; opportunity cost of capital
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