74
Business Finance
Lecture 13
Review of the Previous Lecture
Using Financial Statement Information
Internal Uses
External Uses
Benchmarking
Time trend Analysis
Peer Group Analysis
Time Value of Money
Simple vs. Compound Interest
Future Value Concept
One Period valuation
Multi-Period Valuation
Topics under Discussion
Present Value Concept
One period Valuation
Multi-period Valuation
Determining the Discount Rate
Finding the Number of Periods
Future Value
¾
Usually simple interest is used in financial institutions for interest periods of less than one
year.
¾
If the rate is expressed as an annual rate (normal practice), then the time period (t) must
be a fraction of a year.
¾
By investing $10,000 in an 8%, 90-day certificate of deposit, total proceeds at the end of
the CD period will be:
¾
FV = (10,000)+(10,000x.08x90/365) = $10,197.26
Future Value
If you were to invest $10,000 at 5-percent interest for one year, your investment would grow
to $10,500
$500
would be interest ($10,000 × .05)
$10,000
is the principal repayment ($10,000 ×1)
$10,500
is the total due. It can be calculated as:
$10,500 = $10,000×(1.05).
$10,000 today is worth $10,500 in one year, given that interest rate is 5%

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Present Value
It refers to the current value of the future cash flow discounted at the appropriate discount rate.

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