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# lec15_money - Time Value of Money 15.511 Corporate...

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1 Time Value of Money 15.511 Corporate Accounting Summer 2004 Professor S. P. Kothari Sloan School of Management Massachusetts Institute of Technology July 2, 2004

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2 LIABILITIES: Current Liabilities Obligations that must be discharged in a short period of time (generally less than one year) Reported on balance sheet at nominal value Examples: Accounts payable Short-term borrowings Current portion of long-term debt Deposits Warranties Deferred Revenues / Income
3 LIABILITIES: Long-term Liabilities Obligations spanning a longer period of time (generally more than one year) Generally reported on the balance sheet at present value based on interest rate when initiated Examples: Bonds Long-term loans Mortgages Capital Leases How do we compute present values? And interest expense?

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4 Time Value Of Money Time 1 \$1.00 Interest = 10% Time 1 \$1.10 Time 0 \$1.00 Future value of \$ 1.00 today = \$1.00 (1+10%) = \$1.10 at the end of one year. What is the present value of \$1.10 to be received one year from now? Present value of \$1.10 one year from now = \$1.10/(1+10%) = \$1.00 What is the present value of \$1.00 to be received one year from now? Present value of \$1.00 one year from now = \$1.00/(1.10) = \$0.91
5 Time Value Of Money \$1.00 \$0.91 \$0.83 T=0 \$1.00 T=1 \$1.10 T=2 \$1.21 Future value of \$1.00 two years from now = \$1.00*(1+10%)*(1+10%) = \$1.00*(1.10) 2 = \$1.21 Present value of \$1.00 to be received two years from now

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lec15_money - Time Value of Money 15.511 Corporate...

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