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Chapter4a+notes

# Chapter4a+notes - Chapter 4 Time Value of Money Focusing...

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Chapter 4 Time Value of Money

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2 Spring 2009 Focusing Question Ellen is 35 years old, and she has decided it is time to plan seriously for her retirement. She plans to start saving \$10,000 in a retirement account at the end of each year until she is 65. How can Ellen find out how much she will have saved when she is 65?
3 Spring 2009 Course Plan Financial Management Foundation and Tools Valuation Short-term Financial Management Risk and Return Long-term Financing Decisions Financial Statement Analysis Capital Budgeting Working Capital Management Cost of Capital Capital Structure Valuation Principle Time Value of Money Bonds and Stocks Payout Policy Investment Decision Rules

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4 Spring 2009 Outline Time Value of Money Rules of Time Travel Series of Regular Cash Flows Other Variables Perpetuities Annuities Amount of Cash Flows Number of Periods Rate of Return Series of Growing Cash Flows FV & PV
5 Spring 2009 Learning Objectives 1. Construct a timeline in solving TVM problems. 2. Explain the relationship between interest rate, time period and the future value of a current cash flow. 3. Explain the relationship between interest rate, time period and the present value of a future cash flow. 4. Using financial calculator, calculate the future value of a. a single sum. b. an ordinary annuity and an annuity due.

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6 Spring 2009 Learning Objectives 5. Using financial calculator, calculate the present value of a. a single sum. b. a perpetuity. c. an ordinary annuity and an annuity due. 6. Compute the net present value (NPV) of any set of cash flows.
7 Spring 2009 FV and Compounding ± Suppose your great granduncle deposited \$10 at 5.5% interest 200 years ago. How much would the investment be worth today? ² FV = \$10(1.055) 200 = \$447,189.84 ± Power of compounding ² Simple interest = \$10 + \$10(200)(.055) = \$120 ² Compounding added \$447,069.84 to the value of the investment! ± Simple interest ² interest is earned only on the original principal ± Compound interest ² interest is earned on principal and on interest received

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8 Spring 2009 Power of Compounding Figure 4.1
9 Spring 2009 FV – Important Relationships ± For a given interest rate, r, the longer the time period, the larger the future value ± For a given time period, t, the higher the interest rate, the larger the future value

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Chapter4a+notes - Chapter 4 Time Value of Money Focusing...

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