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Unformatted text preview: of money part 1  1 FNAN 301 Financial Management Time value of money Part 1 of money part 1  2 Topics Covered Overview of time value of money Single cash flows Simple interest Compound interest Future value Present value Implied rate Length of time Noncurrent reference point Timelines of money part 1  3 Time Value of Money What’s the most you would pay today for the pink piggy bank if it had $100 in it and you could get into it today? What’s the most you would pay today for the purple piggy bank if it had $100 in it and you could not get into it for one year? What’s the most you would pay today for the yellow piggy bank if it had $100 in it and you could not get into it for five years? of money part 1  4 Time Value of Money The time value of money involves the concept that a dollar paid or received at one point in time has a different value than a dollar paid or received at a different point in time A dollar paid or received today does not have the same value as a dollar paid or received tomorrow A dollar paid or received tomorrow does not have the same value as a dollar paid or received in two days of money part 1  5 Time Value of Money Initially, assume interest rates, returns, cash flows, and values are known with certainty Later this assumption will be loosened of money part 1  6 Simple Interest One way that money can grow is by simple interest Simple interest involves earning or accruing interest on principal or original investment only Interest is not earned or accrued on prior interest earned or accrued of money part 1  7 Simple Interest Today is beginning of year 1 (time 0) You have $100 that you put in an investment that earns annual simple interest of 6 percent (.06) per year In 1 year from today You would earn interest of $100 × .06 = $6 in year 1 You would have $100 + $6 = $106 in 1 year In 2 years from today You would earn interest on the original investment of $100 You would earn interest of $100 × .06 = $6.00 in year 2 You would have $106 + $6.00 = $112.00 in 2 years In 3 years from today You would earn interest on the original investment of $100 You would earn interest of $100 × .06 = $6.00 in year 3 You would have $112 + $6.00 = $118.00 in 3 years of money part 1  8 Simple Interest Today is beginning of year 1 (time 0) You have $100 that you put in an investment that earns annual simple interest of 6 percent (.06) In t years with simple interest You would earn interest on the original $100 investment You would earn interest of $100 × .06 = $6.00 in year t You would have $100 + ($100.00 × .06 × t) = ($100.00 × (1 + (.06 × t)) in t years 2 1 t … 100 Value Time 3 100 + (100×.06×1) 100 + (100×.06×2) 100 + (100×.06×3) 100 + (100×.06×t) 100 Value 106.00 112.00 118.00 100 + (100×.06×t) 100 Value 100.00 + (100×.06) 106.00 + (100×.06) 112.00 + (100×.06) (value as of t1) + (100×.06) … … … of money part 1  9...
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This note was uploaded on 02/03/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.
 Spring '09
 MURRAY
 Time Value Of Money, Future Value, Interest

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