topic 3

# topic 3 - NPV and the time value of money Learning...

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Learning objectives Understand the time line and distinguish Cash inflow and outflow Value Cash flows at different points of time Net Present Value of a stream of NPV and the time value of money

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Prescribe book Berk,J. ,Demarzo,P. and Harford,J.,2009, Fundamentals of Corporate Finance , Pearson Eduation, Chapter 4.
The time line Example You lend money to your friend, and he promises to make 2 payments of \$10,000 at the end of each of the next 2 years. Date 0 1 2 Year 1 Year 2 Cash Flow 0 Tod ay 10,00 0 End Yr2 10,000 End Yr1, begin Yr2

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Distinguishing Cash Inflows from Outflows Cash inflows: Cash flows received are positive cash flows Cash outflows: Cash flows paid out are negative cash flows Example: You lend your friend \$10,000 and he has agreed to pay back in 2 installments of \$6000 at the end of each of the next two years Time line
Various time periods Example You have to pay tuition of \$10,000 per year for the next 4 years. The tuition payments must be made in equal installments of \$5000 every 6 months. What Date Cash Flow 3 1/2 4 Year 4 \$5,000 \$5,000 \$5,000 Year 1 Year 2 1 1/2 2 \$5,000 \$5,000 \$5,000 \$5,000 \$5,000 \$0 0 1/2 1 Year 3 2 1/2 3

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Valuing Cash Flows at Different Points in Time Rule 1: it is only possible to compare and combine values at the same point in time
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## This note was uploaded on 12/17/2011 for the course B.A 13 taught by Professor Cr during the Spring '11 term at Haverford.

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topic 3 - NPV and the time value of money Learning...

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