02TimeValueOfMoney1

02TimeValueOfMoney1 - 9/8/2010 Centre for Management of...

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9/8/2010 1 Centre for Management of Technology and Entrepreneurship University of Toronto Copyright: Joseph C. Paradi, 1996-2007 Yuri Lawryshyn, 2008-2010 Course: CHE374 Centre for Management of Technology and Entrepreneurship Time Value of Money Part A 2 “Time is Money” Concept of “Time Value of Money” Borrowing (renting) money has a cost for the borrower Lending money should create value for the lender (investor) Interest Rate–cost to borrow / compensation to the lender Has units of time / time (time of compounding period / base time) Nominal versus Effective rate 3 Interest and interest rate Engineering decisions involve comparing the costs and benefits that occur in different time periods Invest in a project today and get the benefits in the future Interest Having money today is preferable than having the same amount one year later interest is compensation for loss of use of cash Interest rate Is the percentage that borrowed money will cost If you have the choice of having $100 today or $100 a year from now, most would prefer the money today. You could buy a machine and use it to make money from the initial investment, or invest it elsewhere. Investment opportunity is lost (or diminished) if the funds are not available until next year.
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9/8/2010 2 4 Interest Rates Expressed as % 9% interest rate means that for every dollar lent, $0.09 is paid in interest for each time period. If no time period is specified, the assumption is per year. Interest rates vary widely over time and different types of investments. A T
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02TimeValueOfMoney1 - 9/8/2010 Centre for Management of...

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