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Unformatted text preview: 21CHAPTER 5Time Value of MoneyFuture valuePresent valueAnnuitiesRates of returnAmortization22Last weekObjective of the firm Business formsAgency conflictsCapital budgeting decision and capital structure decision23The plan of the lectureTime value of money conceptspresent value (PV)discount rate/interest rate (r)Formulae for calculating PV of perpetuityannuityInterest compoundingHow to use a financial calculator24Financial choices with timeWhich would you rather receive?$1000 today $1040 in one year Both payments have no risk, that is, there is 100% probability that you will be paid25Financial choices with time Why is it hard to compare ? $1000 today $1040 in one yearThis is not an “apples to apples” comparison. They have different units$1000 today is different from $1000 in one yearWhy?A cash flow is timedated money26Present valueTo have an “apple to apple” comparison, we convert future payments to the present values or convert present payments to the future values This is like converting money in Canadian $ to money in US $.27Some termsFinding the present value of some future cash flows is called discounting.Finding the future value of some current cash flows is called compounding.28What is the future value (FV) of an initial $100 after 3 years, if i = 10%?Finding the FV of a cash flow or series of cash flows is called compounding.FV can be solved by using the arithmetic, financial calculator, and spreadsheet methods.FV = ?12310%10029Solving for FV:The arithmetic methodAfter 1 year:FV1 = c ( 1 + i ) = $100 (1.10) = $110.00After 2 years:FV2 = c (1+i)(1+i) = $100 (1.10)2 =$121.00After 3 years:FV3 = c ( 1 + i )3 = $100 (1.10)3 =$133.10After n years (general case):FVn = C ( 1 + i )n210 Set up the Texas instrument2nd, “FORMAT”, set “DEC=9”, ENTER2nd, “FORMAT”, move “↓” several times, make sure you see “AOS”, not “Chn”.2nd, “P/Y”, set to “P/Y=1”2nd, “BGN”, set to “END” P/Y=periods per year, END=cashflow happens end of periods211Solving for FV:The calculator methodSolves the general FV equation.Requires 4 inputs into calculator, and it will solve for the fifth. INPUTSOUTPUTNI/YRPMTPVFV310133.10100212PV = ?100What is the present value (PV) of $100 received in 3 years, if i = 10%?...
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This note was uploaded on 10/05/2011 for the course FIN 350 taught by Professor Chen during the Spring '07 term at S.F. State.
 Spring '07
 Chen

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