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4.1 - The Time Value of Money Part 1 1 Time Value of Money...

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1 The Time Value of Money Part 1
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2 Time Value of Money The basic idea behind the concept of time  value of money is: $1 received today is worth more  than $1 in  the future          OR  $1 received in the future is worth less  than $1  today Why? because interest  can be earned on the money The connecting piece or link between  present (today) and future is the  interest  or discount rate PPT 9-3
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3 Figure 9-1 Relationship of present value and future value $1,000 present value $1,464.10 future value Number of periods 1 2 3 4 0 $ 10% interest PPT 9-5
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4 Future Value Note that in ‘future value’ calculations, there are four  elements: Given any three of them, we can always determine the  fourth. OFTEN “I” IS USED INSTEAD OF “r” periods of number The period per rate interest The lue present va The value future The n r PV FV n
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5 FINANCIAL CALCULATOR BAII PLUS TEXAS INSTRUMENT . BE SURE YOU UNDERSTAND  FORMULAS THAT ARE PROGRAMMED  INTO THE CALCULATOR READ MANUAL
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6 TIME VALUE OF MONEY LUMP SUMS 1. PRESENT VALUE 2. FUTURE VALUE BASIC CALCULATIONS
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7 Future Value Consider the payoff after one year from an  investment of $100 at 10% interest per annum  110 10 100 % 10 100 100 = + = × + =
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8 Future Value When we think of future value we think of  determining the value at a distant date of an  amount to be paid at a near date. Year 0 1 2 3 4 | | | | | Value Future Value
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9 Future Value Now, let us represent the interest rate using the  symbol  r ) 1 ( 100 100 100 r r + × = × + =
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10 Future Value Now, let us represent the future payoff using FV  (future value) and the amount invested using PV  (present value).
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