20090122 - FinancialManagement BarryMarchman,Ph.D.

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1 Financial Management Barry Marchman, Ph.D. Georgia Institute of Technology Atlanta, GA 30332 Ph: 404-894-5110 Email:  barry.marchman@mgt.gatech.edu 
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2 Time Value of Money
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3 Objectives Describe why a _______ today is worth more than a  __________ received in the future Describe the impact of ___________ on interest rates Solve problems using the present value and future value  formulas focusing on:
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4 The nature of finance Two problems are often encountered in finance  Cash flows are often ____________ over long periods of time in the future The cash flows themselves are often ________________ Some notable examples: A Fundamental Question: Does money in the future have different value than money held today?
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5 Illustrative example from baseball contracts Rick Reuschel (“Big Daddy”): Made major league debut in 1972 Played for Chicago Cubs, NY  Yankees, Pittsburgh Pirates, San  Francisco Giants  Career record: 214-191, ERA: 3.37 Most importantly, one of baseball’s  first free agents in 1978 Signed one of baseball’s most unique  contracts: Reported in press to be worth  $8,096,000  The catch: The payments took place over 52  years Rick will be 81 years old when he  gets his final payment
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6 The contract Payment schedule: 1979                          $20,000 1980                          $20,000 1981                          $20,000 1982                          $164,000 1983                          $164,000 1984                          $164,000 2030           $164,000 The sum of these payments is $8,096,000 But is this the “true” worth of the contract?
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7 Why does money received in the future have less value? ____________________ refers to a general rise in prices measured against a standard level of  purchasing power  ____________________ This is because the amount could be deposited in an interest-bearing  bank account (or otherwise invested) from now to some time in the  future and yield some return   ____________________ Compensation for the risk of default on the contract
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8 What is the implication? Investments have to _______ over time Investor has be offered a rate of return on the investment Rate of return will depend on: Compensation for _________________ Compensation for _________________ Compensation for _________________ Money in the future is worth less than money today When making decisions we must ___________ future promised money
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9 Time value of money algebra
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20090122 - FinancialManagement BarryMarchman,Ph.D.

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