Chapter+04[1]

# Chapter+04[1] - 4-1Basic Definitions•Present...

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Unformatted text preview: 4-1Basic Definitions•Present Value (PV)–The current value of future cash flows discounted at the appropriate discount rate–Value at t=0 on a time line•Future Value (FV)–The amount an investment is worth after one or more periods.–“Later” money on a time line4-2Basic Definitions•Interest rate(r)–Discount rate–Cost of capital–Opportunity cost of capital–Required return–Terminology depends on usage4-3Future Values: General FormulaFV = PV(1 + r)tFV = future valuePV = present valuer = period interest rate, expressed as a decimalt = number of periods•Future value interest factor = (1 + r)tNote: “yx” key on your calculator4-4Effects of Compounding•Simple interest –Interest earned only on the original principal•Compound interest–Interest earned on principal and on interest received–“Interest on interest” – interest earned on reinvestment of previous interest paymentsReturn to Quiz4-5Future Values – Example•Suppose you invest the \$100 from the previous example for 5 years. How much would you have?Formula Solution:FV=PV(1+r)t=100(1.10)5=100(1.6105)=161.05Keystrokes: 1.1 ;5 <N100 N161.05104-6Table 4.14-7Figure 4.24-8Present Values•The current value of future cash flows discounted at the appropriate discount rate•Value at t=0 on a time line•Answers the questions:–How much do I have to invest today to have some amount in the future?–What is the current value of an amount to be received in the future?•Present Value = the current value of an amount to be received in the future4-9Present ValuesFV = PV(1 + r)t•Rearrange to solve for PV PV = FV / (1+r)tPV= FV(1+r)-t•“Discounting” = finding the present value of one or more future amounts....
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Chapter+04[1] - 4-1Basic Definitions•Present...

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