Time value of money time

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Unformatted text preview: s), but they can also be modeled as decision choices with cash on hand used to purchase inputs. Terminal values are harder to specify correctly than initial conditions. Enterprise Life Enterprise Enterprise life refers to the length of time an activity lasts. If enterprise life is not a fixed value, but can change depending on decisions, then activities and constraints in the model must be used to keep track of the age of items on hand. Time Value of Money Time A dollar today is preferred to a dollar in the future 1. The dollar could be invested to earn interest 2. If dollar is spent on consumption, we’d prefer to get the enjoyment now 3. Risk is also a factor as unforeseen circumstances could prevent us from getting the dollar 4. Inflation may diminish the value of the dollar over time Present Value and Future Value Present Present Value (PV): the number of dollars available or invested at the current time or the current value of some amount to be received in the future Future Value (FV): the amount to be received at some future time or the amount a present value will be worth at some future date when invested at a given interest rate Present Value Present PV = FV (1 + i ) or FV × n 1 (1 + i ) n i is chosen to represent the decision-maker’s discount rate. The higher the value of i , the more money now is preferred to money in the future. n is the number of periods into the future. Risk Risk Risk is usually a factor in dynamic models, but this chapter deals with the certainty case. Risk is covered in another chapter of the book. Disequilibrium with Known Life Disequilibrium Problem: how to commit resources over a number of time perio...
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This note was uploaded on 11/15/2011 for the course AGEC 7100 taught by Professor Duffy,p during the Fall '08 term at Auburn University.

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