Chapter_05

# Chapter_05 - CHAPTER5 TimeValueofMoney(TVM) Futurevalue n

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2-1 Click to edit Master subtitle style CHAPTER 5 Time Value of Money (TVM) n Future value n Present value n Annuities n Rates of return n Amortization

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2-2 Time lines n Show the  timing of cash flows . n Tick marks occur at the  end  of periods, so  Time 0 is today; Time 1 is the end of the  first period (year, month, etc.) or the  CF 0 CF 1 CF 3 CF 2 0 1 2 3 I%
2-3 Drawing  time lines 100 100 100 0 1 2 3 I% 3 year \$100 ordinary annuity 100 0 1 2 I% \$100 lump sum due in 2 years

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2-4 Drawing time lines 100 50 75 0 1 2 3 I% -50 Uneven cash flow stream
2-5 TVM Terms n Compounding n Discounting n N   I    PV   PMT (or CF)  FV

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2-6 How to Solve TVM Problems n Tables n Formula* n Financial calculator* n Spreadsheet methods * focus in this course
2-7 Time Value of  Lump Sum Cash

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2-8 Future Value n If I have \$XX NOW, how much will it be  worth in the future? n Need to know  n Value now (present value) n Interest rate n Number of periods until the ‘future’ n (At this point – assume initial \$\$ amount  and no additional payments)
2-9 What is the future value (FV) of an initial  \$100 after 3 years, if I/YR = 10%? n Finding the FV of a cash flow or series of cash  flows is called  compounding . n Solve using  n step-by-step n the formula n calculator FV = ? 0 1 2 3 10% 100

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2-10 Solving for FV: formula method n
2-11 Graph of Compounding Power of Compounding

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2-12 Solving for  Present Value n Reciprocal of FV formula n   Solve the general FV equation for PV: PV = FVn / ( 1 + i )n Know this formula! I mporta nt!
2-13 Graph of Discounting Importance of Discounting

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2-14 PV = ? 100 What is the present value (PV) of \$100  due in 3 years, if I/YR = 10%? n Finding the PV of a cash flow or series of  cash flows is called discounting (the reverse  of compounding). n The PV shows the value of cash flows in  terms of today’s purchasing power. 0 1 2 3 10%
2-15 Solving for PV: The  formula  method n Solve the general FV equation for PV: n PV = FVN / (1 + I)N n PV = FV3 / (1 + I)3      = \$100 / (1.10)3      = \$75.13

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2-16 If you know 3 variables…. .
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## This note was uploaded on 04/19/2011 for the course BUSFIN 1030 taught by Professor Zutter during the Summer '08 term at Pittsburgh.

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Chapter_05 - CHAPTER5 TimeValueofMoney(TVM) Futurevalue n

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