ch 5 (Time Value of Money)

# ch 5 (Time Value of Money) - Question to be Asked Chapter 5...

This preview shows pages 1–3. Sign up to view the full content.

Chapter 5 The Time Value of Money Slide 5 - 1 Question to be Asked Suppose you are promised to be given \$100 in year 0, \$200 in year 1, \$300 in year 2, and \$400 in year 3. How about you receive \$1,000 right now? Are you better off from receiving \$1,000 right now? Why? This chapter discusses the time value of money, from which we determine the equivalent payment right now to receiving the money in three years. Slide 5 - 2 The Time Value of Money ± Time value of money A dollar today is better than a dollar in the future. Then, how can we compare money flows if they are at different time points? ± Two approaches Compounding: convert money flows to their future value Discounting: convert money flows to their present value Slide 5 - 3 ± Concept Present value (PV): Earlier money on a time line Future value (FV): Later money on a time line Interest rate: “exchange rate” between earlier money and later money ¾ Discount rate ¾ Opportunity cost of capital ¾ Required return Basic Definitions t=0 1 …… t-1 t Present Value Future Value

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Slide 5 - 4 Future Values ± Suppose you invest \$1,000 for one year at 5% per year. What is the future value in one year? Interest = 1,000(.05) = 50 Value in one year = Principal + Interest = 1,000 + 50 = 1,050 Future value (FV) = 1,000(1 +.05) = 1,050 ± Suppose you leave the money for another year. How much will you have two years from now? FV = 1,000(1.05)(1.05) = 1,000(1.05) 2 = 1,102.50 Future value is the amount to which an investment will grow after earning interest. Slide 5 - 5 Future Values ± The General Formula FV = PV (1 + r) t Where, FV = Future value PV = Present value r = Period interest rate, expressed as a decimal t = Number of periods Future Value Interest Factor (FVIF): FVIF = (1+ r) t FV = PV × FVIF Slide 5 - 6 ± Simple Interest Simple interest assumes that the interest earned is withdrawn or spent eliminating compounding: No interest on interest. \$100+(100x.05)=\$105
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 5

ch 5 (Time Value of Money) - Question to be Asked Chapter 5...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online