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Chapter 4
Time Value of
Money
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Spring 2010
Course Plan
Financial
Management
Foundation
and Tools
Valuation
Shortterm
Financial
Management
Risk and
Return
Longterm
Financing
Decisions
Financial
Statement
Analysis
Capital
Budgeting
Working
Capital
Management
Cost of
Capital
Capital
Structure
Valuation
Principle
Time Value
of Money
Bonds
and Stocks
Investment
Decision
Rules
3
Spring 2010
Outline
Time Value
of Money
Rules of
Time Travel
Series of
Regular
Cash Flows
Other
Variables
Perpetuities
Annuities
Amount of
Cash Flows
Number of
Periods
Rate of
Return
Series of
Growing
Cash Flows
FV & PV
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Spring 2010
Learning Objectives
1.
Construct a timeline to solve TVM problems.
2.
Explain the relationship between interest
rate, time period and the future value of a
current cash flow.
3.
Explain the relationship between interest
rate, time period and the present value of a
future cash flow.
4.
Calculate the future value of a single sum
and the present value of a single sum.
5.
Compute the net present value (NPV) of any
set of cash flows.
5
Spring 2010
Time Travel
±
A dollar in hand today is worth more than a dollar
promised at some future date
±
Tradeoff between money now and money later
depends on
²
Amount of PV versus FV
²
Interest rate, r
²
Length of time, N
±
Timeline specifies all four factors
$PV
0
1
2
N
$FV
r
r
r
r
r
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Spring 2010
Time Line
7
Spring 2010
Basics of TVM: Timeline
±
Assume that you are lending $10,000 to a friend today. You will be
repaid in two annual payments of $6,000, one at the end of each
year over the next two years.
±
Timelines can represent potential cash flows that are expected to
occur at any time period.
±
Differentiate between two types of cash flows:
²
Inflows are positive cash flows.
²
Outflows are negative () cash flows.
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Spring 2010
Example: TVM Basics
Problem:
±
Suppose you must pay college tuition of
$10,000
per
year for the next four years. Your tuition payments must
be made in equal installments of
$5,000
each
every 6
months.
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This note was uploaded on 08/10/2011 for the course FINA 101 taught by Professor X during the Spring '11 term at HKUST.
 Spring '11
 X
 Valuation

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