Ross_Chapter 5

# Ross_Chapter 5 - Manhattan Island Sale Peter Minuit bought...

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Manhattan Island Sale Peter Minuit bought Manhattan Island for \$24 in 626 Was this a good deal? 1626. Was this a good deal?

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Chapter 5: The Time Value of Money NA1003 Corporate Finance FINA1003 Corporate Finance Faculty of Business and Economics University of Hong Kong Dr. Tao Lin
Topics Covered alculate simple interest y Calculate simple interest y Calculate compound interest l lt P t Vl (PV ) y Calculate Present Value (PV) y Calculate Future Value (FV) y Calculate rate of return y Calculate number of periods or the length of time needed to grow the investment

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Timeline nd of the eginning of the Today End of the third year Beginning of the fourth year t=0 t=1 t=2 t=3 t=4 ¾ Unless otherwise stated, t = 0 represents today (the decision point). ¾ Unless otherwise stated, cash flows occur at the end of a time interval. ¾ Cash inflows are treated as positive amounts, while cash outflows are treated as negative amounts. g
Basic Definitions resent Value rlier money on a time line y Present Value – earlier money on a time line y Future Value – later money on a time line t t t h t b t l i d y Interest rate – “exchange rate” between earlier money and later money i t t y Discount rate y Cost of capital pportunity cost of capital y Opportunity cost of capital y Required return

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Some Basic Financial Principles y A dollar today is worth more than a dollar tomorrow. f d ll i th th i k y A safe dollar is worth more than a risky one.
Future Values ture Value ter money on a time line Amount to which an Future Value - later money on a time line. Amount to which an investment will grow after earning interest. mple Interest terest earned only on the original Simple Interest - Interest earned only on the original investment. ompound Interest terest earned on both the initial Compound Interest - Interest earned on both the initial principal and the interest reinvested from prior periods.

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Future Values ample mple Interest Example - Simple Interest Interest earned at a rate of 10% for five years on a principal l f \$100 balance of \$100.
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## This note was uploaded on 02/05/2012 for the course FBE BUSI1007 taught by Professor Lin during the Spring '11 term at HKU.

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Ross_Chapter 5 - Manhattan Island Sale Peter Minuit bought...

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