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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
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
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
IELM120 Interest Rate Time value of money is measured in terms of interest rate . Interest is the cost of money—a cost to the borrower and an earning to the lender Interest rate is an exchange rate across time The rate at which we can convert cash today to cash in the future 7

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

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