FIN504_PowerPoint_Slides_03

FIN504_PowerPoint_Slides_03 - FIN 504: Financial Management...

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FIN 504: Financial Management Lecture 3: Time Value of Money I
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2 FIN 504: Financial Management Theory of the Time Value of Money Why a Time Value? Components Inflation (i) Opportunity Cost Risk NOTE: I will use ‘cash flow’ (C) as a general term to designate any flow of money positive or negative.
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3 FIN 504: Financial Management Discounting and Compounding Distinguish Discounting and Compounding Financial Applications Methods of Calculation Calculator Functions ( Forbidden in this Course !) Tables ( Forbidden in this Course !)
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4 FIN 504: Financial Management Time Value of Money Problems Future Value (FV) Present Value (PV) Time and Interest Rates Non-Annual Problems Continuous Time
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Future Value (FV)
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6 FIN 504: Financial Management Future Value (FV) Compounding This is the equivalent to a one-time deposit in a savings account. If I put in $100.00 today, how much will I have in one year? Ten years? One hundred years? For simplicity, we will assume that the interest rate is constant for however long the money is in the account.
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7 FIN 504: Financial Management Future Value (FV) Calculating the Future Value How much do I have after one year? If the interest rate (r) is 10%, then I have $100.00 × (1 + 10%) = $100.00 × 1.1 = $110.00 after one year. I multiply the original sum by 1, because I still have my original deposit and I also multiply by 0.10 to calculate the added interest.
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8 FIN 504: Financial Management Future Value (FV) Calculating the Future Value How much do I have after two years? At the beginning of the second year I have
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FIN504_PowerPoint_Slides_03 - FIN 504: Financial Management...

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