02-Time-value-of-money-FIN6406

# 02-Time-value-of-money-FIN6406 - Discounted Cash Flow...

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Time Value of Money  Time Value of Money  11 Discounted Cash Flow Analysis (Time Value of Money -- TVM) n Future value n Present value n Annuities n Rates of return n Perpetuities n Amortization

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Time Value of Money  Time Value of Money  22 Time lines show timing of cash flows. CF0 CF1 CF3 CF2 0 1 2 3 i% Tick marks at ends of periods, so Time 0 is today; Time 1 is the end of Period 1, or the beginning of Period 2; and so on.
Time Value of Money  Time Value of Money  33 Time line for an ordinary annuity of \$100 for 3 years. 100 100 100 0 1 2 3 i%

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Time Value of Money  Time Value of Money  44 Time line for uneven CFs -\$50 at t = 0 and \$100, \$75, and \$50 at the end of 100 50 75 0 1 2 3 i% -50
Time Value of Money  Time Value of Money  55 What’s the FV of an initial \$100 after 3 years if i = 10%? FV = ? 0 1 2 3 10% 100 Finding FVs is compounding .

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Time Value of Money  Time Value of Money  66 After 1 year FV1 = PV + INT1 = PV + PV(i) = PV(1 + i) = \$100(1.10) = \$110.00. After 2 years FV2 = FV1(1 + i) = PV(1 + i)2 = \$100(1.10)2 = \$121.00.
Time Value of Money  Time Value of Money  77 FV3 = PV(1 + i)3 = 100(1.10)3 = \$133.10. In general, FVn = PV(1 + i)n After 3 years

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Time Value of Money  Time Value of Money  88 Financial Calculator Solution Financial calculators solve this equation: There are 4 variables. If 3 are known, the calculator will solve for the 4th. Could also use tables.
Time Value of Money  Time Value of Money  99 3 10 -100 0 N I/YR PV PMT FV Here’s the setup to find FV: Clearing automatically sets everything to 0, but for safety enter PMT = 0. Calc. settings: P/YR = 1, END 133.10 INPUT S OUTPU T

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Time Value of Money  Time Value of Money  1010 What’s the PV of \$100 due in 3 years if i = 10% ?
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02-Time-value-of-money-FIN6406 - Discounted Cash Flow...

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