ActSc371_Lecture 8_Chapter 5 (Ross)

# ActSc371_Lecture 8_Chapter 5 (Ross) - ActSc 371 Corporate...

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Lecture 7 Sections 5.1 and 5.2 from Chapter 5: Time Value of Money (Corporate Finance by Ross et al.) ActSc 371 – Corporate Finance 1 Instructor: Dr. Lysa Porth 1

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Introduction Introduction to Corporate Finance 5.1 The One-Period Case 5.2 The Multiperiod Case 2
5.1 The One-Period Case 3 If you were to invest \$10,000 at 5-percent interest for one year, your investment would grow to \$10,500 \$500 would be interest (\$10,000 × .05) \$10,000 is the principal repayment (\$10,000 × 1) \$10,500 is the total due. It can be calculated as: \$10,500 = \$10,000×(1.05). The total amount due at the end of the investment is called the Future Value ( FV ).

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4 5.1 The One-Period Case: Future Value In the one-period case, the formula for FV can be written as: FV = C 0×(1 + r ) Where C 0 is cash flow at date 0 and r is the appropriate interest rate. FV = \$10,500 Year 0 1 C 0 = \$10,000 \$10,000 ´ 1.05 C 0×(1 + r )
5.1 The One-Period Case: Present Value If you were to be promised \$10,000 due in one year when interest rates are at 5-percent, your investment would be worth \$9,523.81 in today’s dollars. The amount that a borrower would need to set aside today to be able to meet the promised payment of \$10,000 in one year is call the Present Value ( PV ) of \$10,000.

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