FM_ch6_notes - Chapter 6: Time Value of Money Summary Role...

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Chapter 6: Time Value of Money Summary Role of Time Value in Finance The timing of cash flows has important economic consequences that are recognized as the Time Value of Money . Time value is based on the belief that a dollar today is worth more than a dollar that will be received at some future date. Future vs. Present Value Future Value is cash you will receive at a given future date. Present Value is the equivalent of cash on hand today. A time line can be used to depict the cash flows associated with a given investment. Since financial managers make decisions at time zero, they tend to rely on present value techniques. Figure 6.2 Compounding and Discounting Computational Aids Financial Tables are commonly used as quick reference tools for determining present and future values at various interest or discount rates of a range of time periods Modern calculators are programmed to perform the complete computational analysis using the underlying formulas for present and future value. Future Value of Single Amount Principal is the amount of money on which interest is paid. Compound Interest is the interest earned on a given deposit that becomes part of 1
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Chapter 6: Time Value of Money the principal at the end of a specified period. Future Value of a present amount is found by applying compound interest over a specified period of time Equation of Future Value FV n = future value at the end of period n . PV = initial principal, or present value. k = annual rate of return. n = number of periods the money is left on deposit. FV n = PV (1+ k ) n Table A-1 provide values for the Future Value Interest Factor (FVIF) which simplifies the process of calculating FV in equation (5.4). o FVIF k,n = (1+ k ) n o FV n = PV FVIF k,n Compounding More Frequently Than Annually Semiannual Compounding involves two compounding periods within the year. Quarterly Compounding involves four compounding periods within the year. FV
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This note was uploaded on 11/15/2009 for the course BBA ADMN3116 taught by Professor G.jensen during the Fall '09 term at Laurentian.

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FM_ch6_notes - Chapter 6: Time Value of Money Summary Role...

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