# 2504c_0920 - BUSI 2504c Essentials of Business Finance...

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BUSI 2504c - Essentials of Business Finance Monday, September 20, 2010 §5.3 more on present and future value §5.4 summary and conclusions §6.1 future/present value of multiple cash flows §6.2 annuities and perpetuities

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anouncements Quiz #1 next Monday September 27, 18:15-18:45 Chapters 1 and 5 BUSI 2504c Monday, September 20, 2010 2 / 34
chapter 5: time value of money (cont.) §5.3 - more on present and future value §5.4 - summary and conclusions BUSI 2504c Monday, September 20, 2010 3 / 34

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time value of money: review future value - amount investment worth after a certain number of periods present value - current value of future cash flows discounted at an appropriate interest rate discount rate - rate used to calculate present value of future cash flows earlier cash flows worth more than later cash flows 0 2 4 6 8 10 period amount Present Value Future Value Number of Periods BUSI 2504c Monday, September 20, 2010 4 / 34
time value of money: future value and present value FV: future value, PV: present value, r : rate, t : # periods future value formula FV = PV ( r + 1 ) t present value formula PV = FV ( r + 1 ) t = FV ( r + 1 ) - t BUSI 2504c Monday, September 20, 2010 5 / 34

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time value of money: texas instruments ba-ii plus FV = future value PV = present value I/Y = period interest rate (note: interest is entered as a percent, not a decimal) N = number of periods Remember to clear the registers ( CLR TVM ) after each problem BUSI 2504c Monday, September 20, 2010 6 / 34
time value of money: present value - example What is the present value of \$2,800 to be received three years from now if the discount rate is 9.5%? answer : \$2,132.63 BUSI 2504c Monday, September 20, 2010 7 / 34

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time value of money: present value - example Courtney invests \$1,200 today. If she can earn a 13.25% rate of return for the next two years, how much money will she have at the end of the two years? answer : \$1,539.07 BUSI 2504c Monday, September 20, 2010 8 / 34
time value of money: future value - example Alexander Industries just had a very profitable year. The owner has decided to invest \$225,000 of the profits in a venture that pays an 8% rate of return for fifteen years. How much more would the investment have been worth if the owner could have made 9% on this investment? answer : \$105,820.50 BUSI 2504c Monday, September 20, 2010 9 / 34

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time value of money: solving for interest rate rearrange FV equation and solve for r FV = PV ( 1 + r ) t ( 1 + r ) t = FV PV 1 + r = FV PV ! 1 / t r = FV PV ! 1 / t - 1 BUSI 2504c Monday, September 20, 2010 10 / 34
time value of money: solving for interest rate (cont.) very simple to do with BAII Plus calculator CPT I/Y "If you are using a financial calculator, the calculator views cash inflows as positive numbers and cash outflows as negative numbers. Be sure and remember the sign convention or you will receive an error when solving for r or t " BUSI 2504c Monday, September 20, 2010 11 / 34

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