Lecture 2_Student_6slides

Lecture 2_Student_6slides - Tutorial/Workshop Qs solutions...

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1 FIN 221 Lecture 2 CH5: Time Value of Money CH6: Discounted Cash Flows and Valuation 2 Tutorial/Workshop Qs solutions • To be released at 5:30pm every Thursday • Wiley-Plus to be activated soon. Wait for my announcement! • Not part of assessment • If you want to attempt extra questions • FIN221 Mid-session exam formula sheet placed on the e-learning site Practical online quiz Mid-session formula sheet 3 When you send me an email • Please use your UOW email account otherwise I will not answer. 4 Background • Knowing the value of an asset is a crucial step in making investment and financing decisions. • Then how do we determine the value of the asset? • To answer the above question, let me ask you – What determines profitability of an asset in finance? 1. The asset’s ability to generate sufficient __________. • Then what determines the value of the assets? 1. __________________ 2. The risk associated with future _________. 5 6 What are we learning today? • How to value future cash flows? – In finance, the value of asset is determined by future cash flows the firm can generate and the risk involved. – Then do we know how to value different type of future cash flows mathematically? Let’s learn today. – How much is the asset worth TODAY ? i.e) What is the maximum price you’re willing to pay today? |_____|_____|_____|_____|_____|_____|_____|_____| Year 0 1 2 3 4 5 6 7 8 \$100 \$100 \$100 \$100 \$100 \$100 \$100 \$100 P=?

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2 7 Relevant Reading Chapters •5 .1 .2 -Single period investment -Two-period investment -Future value equation (Line 1 to Line 5) Applying FV formula -Calculator tips .3 .4 -Compound growth rates -Concluding Comments •6 . 1 . 2 -PV of Annuity Calculator tip- finding PV of annuity Finding monthly or yearly payments -FV of Annuity -Perpetuities -Annuity due . 3 - Growing Perpetuity . 4 - Why the confusion? - Calculating EAR - Comparing interest rates - appropriate interest rate factor 8 Time value of money A dollar today is worth more than a dollar tomorrow. Which one of these assets would you rather own? |_____|_____|_____|_____|_____|_____|_____|_____| Asset 1 Year 0 1 2 3 4 5 6 7 8 \$100 |_____|_____|_____|_____|_____|_____|_____|_____| Asset 2 Y e a r 0 123456 7 8 \$100 |_____| \$1 > \$1 9 Future Value FUTURE VALUE (FV) • If you were to invest \$100 at 10-percent interest for one year, your investment would grow to \$110 . – \$10 would be interest (\$100 × 0.1) – \$100 is the principal repayment – \$110 is the total due . It can be calculated as: \$110 = \$100 + \$100X0.10 = \$100X(1+0.10)=\$10,000X(1.10) • The total amount due at the end of the investment is called the Future Value ( FV ) .
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Lecture 2_Student_6slides - Tutorial/Workshop Qs solutions...

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