Notes 10_Fina Acct_II

Notes 10_Fina Acct_II - MII Business Fundamentals Part 2...

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IELM120 1 MII Business Fundamentals Part 2 – Time Value of Money
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IELM120 Learning Objectives Explain the concept of time value of money Understand the NPV decision rule Solve TVM problems involving a single payment, perpetuities, or annuities. 2
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IELM120 Introduction As a manager, you may face the following situations: Valuing a stream of cash flows Making decision on accepting or rejecting a project Choosing among alternatives In your personal life, you may encounter the flowing financial decisions Taking out a car loan or home loan Planning for retirement Making investment 3
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IELM120 Cost and Benefit Analysis Simple Period (money is valued on the same basis – no time value adjustments for money occurring within the same month, quarter, or year) Multiple Period (time value of money is generally incorporated if the money is over a number of years) Example: Company spent A, B, C in three consecutive years; total project cost is not equal to A + B+ C Money of the same dollar amount in different time periods has different values 4
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IELM120 Time Value of Money 5
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IELM120 Time Value of Money (TVM) Consider an investment opportunity with the following certain cash flows. Cost: $100,000 today Benefit: $105,000 one year later Accept or reject the investment? Time value of money: The difference in value between money today and money in the future How to convert the nominal amounts to a common unit? 6
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IELM120 Interest Rate Time value of money is measured in terms of interest rate .
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This note was uploaded on 01/28/2011 for the course IELM 120 taught by Professor Fu,qi during the Spring '09 term at HKUST.

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Notes 10_Fina Acct_II - MII Business Fundamentals Part 2...

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