ch%205%20(Time%20Value%20of%20Money)[1]

# ch%205%20(Time%20Value%20of%20Money)[1] - 5 Introduction to...

This preview shows pages 1–5. Sign up to view the full content.

5 Introduction to Valuation: 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.

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

View Full Document
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 Cost of capital ¾ Opportunity cost of capital ¾ Required return Basic Definitions t=0 1 …… t-1 t Present Value Future Value
Slide 5 - 4 Future Values ± S uppose 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 ± S uppose 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

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

View Full Document
Slide 5 - 6 ± Simple Interest Simple interest assumes that the interest earned is withdrawn or spent eliminating compounding: No interest on interest.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 / 11

ch%205%20(Time%20Value%20of%20Money)[1] - 5 Introduction to...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online