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lecture 13 - Business Finance Lecture 13 Review of the...

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