TEST 1/ LECTURE 2:
TIME VALUE OF MONEY
PART I
An Experiment
In the Social Network, the founder of Facebook basically gets
$18,000
in startup money
from his partner in exchange for
30% of the company’s profits
.
How would you value
this opportunity?
Rate of interest you will earn?, what are the cash flows?, WHEN will you pay?, what’s
the risk….where else could I spend money?
How do I evaluate the information? (above questions)
Our experiment illustrates the idea of the time value of money.
•
A dollar today is not the same thing as a dollar expected tomorrow.
•
The evaluation of future cash flows is a fundamental theme underlying all areas of
finance.
•
The concept of time value of money is quantified through the use of Discounted
Cash Flow Analysis (DCF)
•
DCF techniques allow us to make an exact dollar value adjustment for time and
risk so that we can compare the current “worth” of cash flows arriving at different
times and/or having different amounts of risk associated with them.
If we add a few definitions, we can move cash flows across time….
DCF Lump Sum Problems
A lump sum is a single cash flow at one point in time….also called an amount.
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 Spring '08
 LAPLANTE
 Time Value Of Money, Net Present Value

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