ch7-lect - Chapter 7 The Time Value of Money Introduction...

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Chapter 7 The Time Value of Money Introduction You’ve heard the saying, “a dollar now is worth more than a dollar later”. Why is this so? Because as time passes there are two things affect the value of our dollar: interest rates and the inflation rate. This is why every decision that a manager makes about what investments to choose or what projects to undertake has a related economic cost in terms of financing and opportunity costs and risk premiums. Each decision or path must be analyzed in terms of financial cost and true economic value added to compare the benefits of one choice over another. That is our job as financial managers. Some of the questions that we ask ourselves about the value of our dollar are “what will it be worth at a future date, or how much do I need to pay in to accumulate a certain amount, what will my periodic payment be to pay down a certain amount, or what interest rate have I paid on this principle if I make these payments”? To translate these questions into financial equations, let’s briefly look at the future and present value of a lump sum, and then the future and present value of an annuity or series of payments. You'll notice that I encourage the use of Excel because it is a very visual tool for learning about the time value of money.
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This note was uploaded on 02/14/2011 for the course FINANCE 615 taught by Professor Green during the Fall '09 term at UMBC.

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ch7-lect - Chapter 7 The Time Value of Money Introduction...

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