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: ² Accounts payable ² Short-term borrowings ² Current portion of long-term debt ² Deposits ² Warranties ² Deferred Revenues / Income
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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
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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%)
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lec15_money - Time Value of Money 15.511 Corporate...

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