# CHP5_upload - Chapter 5 Introduction to Valuation The Time...

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Chapter 5 Introduction to Valuation: The Time Value of Money

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5-2 Key Concepts and Skills Be able to compute the future value of an investment made today (FV) Be able to compute the present value of cash to be received at some future date (PV) Be able to compute the return on an investment (R) Be able to compute the number of periods that equates a present value and a future value given an interest rate (N) Be able to use a financial calculator to solve time value of money problems
5-3 Chapter Outline Future Value and Compounding Present Value and Discounting

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5-4 Basic Definitions Present Value – earlier money on a time line Future Value – later money on a time line Interest rate – “exchange rate” between earlier money and later money Discount rate Cost of capital Opportunity cost of capital Required return
5-5 Is It Worth It? Which do you prefer--\$1000 today or \$1000 in 20 years? Is giving up \$500 today in exchange for \$10,000 in 20 years a good deal?

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5-6 Future Values Suppose you invest \$1000 for one year at 5% per year. What is the future value in one year? Interest = 1000(.05) = 50 Value in one year = principal + interest = 1000 + 50 = 1050 Future Value (FV) = 1000(1 + .05) = 1050 Suppose you leave the money in for another year. How much will you have two years from now? FV = 1000(1.05) (1.05) = 1000(1.05) 2 = 1102.50
5-7 Future Values

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5-8 Future Values: General Formula FV = PV(1 + r) t FV = future value PV = present value r = period interest rate, expressed as a decimal t = number of periods Future value interest factor = (1 + r) t
5-9 Effects of Compounding Simple interest Compound interest Consider the previous example FV with simple interest = 1000 + 50 + 50 = 1100 FV with compound interest = 1102.50 The extra 2.50 comes from the interest of . 05(50) = 2.50 earned on the first interest payment

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5-10 Future Values
5-11 Calculator Keys Texas Instruments BA-II Plus FV = future value PV = present value I/Y = period interest rate

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