# MF1S1 - GSB 531 Managerial Finance Chapter 5 Introduction...

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1 GSB 531 Managerial Finance Chapter 5 Introduction to Valuation: The Time Value of Money Valuation of Future Cash Flows After a year: \$100 * 10% + \$100 = \$110 After two years: \$110 * 10% + \$110 = \$121 After three years: \$121 * 10% + \$121 = \$133.1 Compounding • Interest earned in the second year: \$110 * 10% = \$100 * 10% + \$10 * 10% • Compounding: reinvesting the interest, thus earning interest on interest. • Compound interest: interest earned on both the initial principal and the interest reinvested from prior periods. • Simple interest: interest earned only on the original principal.

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2 Future Value • If interest rate is r each period, what is the future value of \$1 after investing it for t periods ??? Future Value • Future value = \$1 * ( 1 + r ) t The Power of Compounding • \$5 investment, at 6% per year, for 200 years. • Simple interest: \$5 * 6% * 200 = \$60 plus principal \$60 + \$5 = \$65 .
3 Present Value and Discounting Single Period • Future value a year from now: \$400. Present Value and Discounting

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MF1S1 - GSB 531 Managerial Finance Chapter 5 Introduction...

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