topic 2 - TOPIC 2 time value of money and decision making...

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Learning objective Ø Understanding the time value of money Ø Defining the effect of interest rate on time value of money Ø Learning NPV and its application time value of money and decision making TOPIC 2
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Prescribe book Berk,J. ,Demarzo,P. and Harford,J.,2009, Fundamentals of Corporate Finance , Pearson Eduation, Chapter 3.
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The Time value of Money Example 1: Consider a firm’s investment opportunity: Cost: invest $100,000 today Benefit: $105,000 in one year Project net value : $105,000- $100,000=$5,000 correct or not? Is it reasonable to treat money today as equivalent to money in 1 year? If the interest rate of the bank is 7%, how much is your money after one year deposit in the bank?
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The difference in value between money today and money in the future called the time value of money. The Time value of Money
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The rate at which we can exchange money today for money in the future is determined by the current interest rate. The interest rate tells us the market price today of money in the future Example: Recall example 2 The Converting cash interest rate
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Interest rate The interest rate, r, for a given period as
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