Chapter 2 - 1 PrinciplesofFinanceFIN3100 Chapter3- The Time...

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Principles of Finance – FIN 3100 Chapter 3  - The Time Value of Money – Part 1 1
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Agenda Understand why we measure value. Understand the time value of money. Learn how time value of money concepts can be  applied to making financial decisions.   Specifically, How can we determine the future value of an  investment made today?  2
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Abbreviations 3
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There is a time value  to  money. Money has two dimensions:   how much  and  when . Value is what something is worth based on  when  we  receive it. 4
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Which would you rather have… …a dollar today or a dollar tomorrow?  Why? A dollar in hand today is worth more than a  dollar promised at some time in the future. If you had the money today, you could spend it. Or, you could invest it, foregoing use of the funds  for a period of time and can earn interest on it. 5
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Timelines We’ll use timelines to visualize cash flow  amounts and when  they occur. 6 0 1 2 3 4
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What is an  interest rate ? It is an  exchange rate  between money now and  money later. What does a  time value of money  equation tell  you? It provides equivalent values at different points in  time. 7 0 1 2 3 4 $10 $?
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We refer to money in hand today as the  present  value   and that same money  at some point in the  future as its  future value . Future Value The amount of money an investment will grow to  over some period of time at some interest rate. Present Value 8
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Interest Rates By convention, a percentage rate is expressed  annually. 10% means 10 percent per annum, or year. It does not matter if the investment horizon is  shorter than a year. The rate can be adjusted to the appropriate effective  periodic rate. 9
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Investing For A Single Period Investing for a single period refers to moving a  single dollar amount forward (or backward) on  the time-line for  one period . 10 0 1 $100 $?
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Future Value Question : If you invest $100 at 10% for one year, how much  money will you have? 11 0 1 $100 $?
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Future Value Investing in a  Single Period : If you invest $100 at 10%   for one year,   how much  money would you have? $   10 interest      ($100)(10%, or .10) + $ 100 principal    ( original investment ) = $110 12
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Future Value Investing in a  Single Period : If you invest for one period at an interest rate of  r,  your investment will grow to  (1+r)  per dollar  invested. 1
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Chapter 2 - 1 PrinciplesofFinanceFIN3100 Chapter3- The Time...

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