L_9 - Lecture 9 Net Present Value and Other Investment...

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Lecture 9 Net Present Value and Other Investment Criteria Lecture Organization Present Value and Discounting Annuity and perpetuity Net Present Value The Payback Rule The Discounted Payback
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“Time value of money" and "the money value of time" A dollar today is worth more than a dollar later“ WHY? Every dollar generates interest every year and every time period Time Value Terminology
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PV is the Present Value, that is, the value today . FV is the Future Value, that is, the value at a future date . Future and Present Value Terminology
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Denotation: The number of years between the Present Value and the Future Value is represented by “ t ”. The rate of interest is represented by “ r ”. In general, the Future Value, FV t , of $X invested today at r% for t periods is FV t = $X × (1 + r ) t The expression (1 + r ) t is the Future Value Interest Factor or compounding factor Time Value Terminology
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Quick Quiz - A. Multiply the $5000 by the (FVIF) Future Value Interest Factor: $5000 × (1 + r ) t = $5000 × (1+0.12) 6 = $9869.11 Q. Deposit $5,000 today in an account paying 12%. How much will you have in 6 years if the interest is compound?
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The PV of $X to be received in t periods when the
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