Chapter4a notes

# Chapter4a notes - Chapter 4 Time Value of Money Course Plan Financial Management Valuation Short-term Financial Management Risk and Return

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Chapter 4 Time Value of Money

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2 Spring 2010 Course Plan Financial Management Foundation and Tools Valuation Short-term Financial Management Risk and Return Long-term 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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4 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 ± Trade-off 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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6 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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8 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.

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Chapter4a notes - Chapter 4 Time Value of Money Course Plan Financial Management Valuation Short-term Financial Management Risk and Return

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