Ch.9_Time Value of Money_Inst

# Ch.9_Time Value of Money_Inst - CHAPTER 9 Time Value...

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1 Future and present values Lump sums Annuities CHAPTER 9 Time Value Analysis

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2 Learning Objectives Explain the economic rationale underlying time value of money Calculate present and future values for lump sums and annuities Explain and apply the opportunity cost principle
3 Time Value of Money Value takes account of both current and future cash flows A dollar in hand today is worth more than a dollar to be received in the future Inflation Risk Preference for current consumption Opportunity cost Time value analysis constitutes techniques used to account for the time value of money

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4 Time Lines: Tools for time value analysis CF 0 CF 1 CF 3 CF 2 0 1 2 3 I% Tick marks designate ends of periods. Time 0 is the starting point (the beginning of Period 1); Time 1 is the end of Period 1 (the beginning of Period 2); and so on.
5 Types of cash flows Lump sum Single payment at one period of time Annuity Equal payments that you receive at the end of equal periods in time Ordinary annuity Cash flows received at ends of periods Annuity due Cash flows received at beginning of periods

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6 Types of analysis Present value (discounting) \$ Value Time Known cash flow \$\$ Value today ??
7 Types of analysis Future value (compounding) \$ Value Time Known cash flow \$\$ Value in the future ??

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Ch.9_Time Value of Money_Inst - CHAPTER 9 Time Value...

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