02-Time-value-of-money - Discounted Cash Flow Analysis...

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Time Value of Money  1 Discounted Cash Flow Analysis (Time Value of Money -- TVM) Future value Present value Annuities Rates of return Perpetuities Amortization
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Time Value of Money  2 Time lines show timing of cash flows. CF 0 CF 1 CF 3 CF 2 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.
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Time Value of Money  3 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  4 Time line for uneven CFs -$50 at t = 0 and $100, $75, and $50 at the end of Years 1 through 3. 100 50 75 0 1 2 3 i% -50
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Time Value of Money  5 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  6 After 1 year FV 1 = PV + INT 1 = PV + PV(i) = PV(1 + i) = $100(1.10) = $110.00. After 2 years FV 2 = FV 1 (1 + i) = PV(1 + i) 2 = $100(1.10) 2 = $121.00.
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Time Value of Money  7 FV 3 = PV(1 + i) 3 = 100(1.10) 3 = $133.10. In general, FV n = PV(1 + i) n After 3 years
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Time Value of Money  8 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. ( 29 FV PV i n n = + 1 .
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Time Value of Money  9 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 INPUTS OUTPUT
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Time Value of Money  10 What’s the PV of $100 due in 3 years if i = 10% ?
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02-Time-value-of-money - Discounted Cash Flow Analysis...

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