Class4&5 - Part 1

Class4&5 - Part 1 - ItsallabouttheMoney...

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It’s all about the Money The Time Value of  Money
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Money now vs. Money later Would you prefer $1 today or $1 sometime in  the future? How much should I give you to  convince you to choose money later? Should you pay cash or finance to buy the  engagement ring to propose? How much should you deposit into your  retirement account to buy your dream  vacation house in Bahamas/Hawaii?
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Basic Definitions Present Value – earlier money on a time line Future Value – later money on a time line Interest rate – “exchange rate” between earlier  money and later money Discount rate Cost of capital Opportunity cost of capital Required return
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Future Value (FV) Suppose you invest $1,000 for one year at 5% per  year.  What is the future value in one year? Interest = 1,000(.05) = 50 Value in one year = Principal + Interest      = 1,000 + 50 = 1,050 Future Value (FV) = 1,000(1 + .05) = 1,050 Suppose you leave the money in for another year.   How much will you have two years from now? FV = 1,000(1.05)(1.05) = 1,000(1.05)2 =  1,102.50
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Future Value (FV) FV = PV(1 + r)t FV = future value PV = present value r = period interest rate, expressed as a  decimal t = number of periods Future value interest factor = (1 + r)t
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Class4&5 - Part 1 - ItsallabouttheMoney...

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