# lecture 14 - Business Finance Lecture 14 Review of the...

This preview shows pages 1–3. Sign up to view the full content.

79 Business Finance Lecture 14 Review of the Previous Lecture z Present Value Concept One period Valuation Multi-period Valuation Topics under Discussion z Present Value Concept Evaluating Investment Determining the Discount Rate Finding the Number of Periods z Discounted Cash Flow Valuation Multiple Cash Flow z Future Value z Present Value Annuities Evaluating Investments z A company is considering the purchase of an asset for \$335, which may be sold for \$400 in three years. If the discounting factor is 10%, is this a good investment? z Since the company can invest \$335 elsewhere at 10%, in three years, it would grow to: \$335 x (1 + r) t = \$335 x 1.1 3 = \$335 x 1.331 = \$445.89 z Since the proposed purchase of asset pays out only \$400, it is not as good as other investment alternatives Evaluating Investments z Another way of looking at it is to calculate the present value of \$400 in three years at 10%: \$400 x [1/(1+r) t ] = \$400 / 1.1 3 = \$400 / 1.331 = \$300.53 z This tells us that we only have to invest about \$300 to get \$400 in three years, not \$335 What Rate Is Enough? z Assume the total cost of a college education will be \$50,000 when a child enters college in 12 years. The Parents have \$5,000 to invest today. z What rate of interest must you earn on your investment to cover the cost of your child’s education?

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

View Full Document
80 t r C FV ) 1 ( 0 + × = 12 ) 1 ( 000 , 5 \$ 000 , 50 \$ r + × = 10 000 , 5 \$ 000 , 50 \$ ) 1 ( 12 = = + r 12 1 10 ) 1 ( = + r 2115 . 1 2115 . 1 1 10 12 1 = = = r . About 21.15% Benjamin Franklin: A Case Study z Benjamin Franklin died on April 17, 1790. In his will, he gave 1,000 pounds sterling to Massachusetts and the city of Boston. He gave a like amount to Pennsylvania and the city of Philadelphia. z The money was paid to Franklin when he held political office, but he believed that politicians should not be paid for their service(!). z Franklin originally specified that the money should be paid out 100 years after his death and used to train young people. z Later, however, after some legal wrangling, it was agreed that the money would be paid out 200 years after Franklin’s death in 1990. z
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 08/04/2011 for the course ACCT 501 taught by Professor Na during the Spring '11 term at Virtual University of Pakistan.

### Page1 / 7

lecture 14 - Business Finance Lecture 14 Review of the...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online