05 TVM - handout

05 TVM - handout - Ch. 5 - The Time Value of Money Ch. 5 -...

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Unformatted text preview: Ch. 5 - The Time Value of Money Ch. 5 - The Time Value of Money Mind Map • Why?: Most long-term projects have cash flows that occur at different points in time. Given that the passage of time impacts the value of cash flows, the value of a project is dependent on how we assess these differences. The purpose of this chapter is to develop the tools necessary to evaluate cash flows over time in order to make optimal decisions. Mind Map • Learning objective: – Develop an understanding of how time impacts cash flows – Quantify the time/value relationship – Evaluate complex financial contracts/projects Mind Map • Key words/concepts: – TVM – PV, FV, PVA, FVA – Lump-sum, annuity – Ordinary annuity vs. Annuity due – Perpetuity – Deferred annuity – Mixed-stream cashflow – WORK LOTS OF PROBLEMS! Terminology Terminology • Translate $1 today into its equivalent in the future (COMPOUNDING) . • Translate $1 in the future into its equivalent today (DISCOUNTING) . ? ? Today Future Today Future Note: • It’s easiest to use your financial functions on your calculator to solve time value problems. However, you will need a lot of practice to eliminate mistakes. • Finance and Accounting Majors : It will be helpful later to take extra time now learning to use the formulas as well as the financial functions on your calculator! Future Value Compounding problems Future Value - single sums If you deposit $100 in an account earning 6%, how much would you have in the account after 1 year? 1 PV = PV = FV = FV = Future Value - single sums If you deposit $100 in an account earning 6%, how much would you have in the account after 1 year? Mathematical Solution: FV = PV (1 + i) n FV = 100 (1.06) 1 = $?? Notice that there is one equation and four variables. What does this tell you about how much information 1 1 PV = -100 PV = -100 FV = FV = ?? ?? Future Value - single sums If you deposit $100 in an account earning 6%, how much would you have in the account after 1 year?...
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This note was uploaded on 02/17/2012 for the course FINANCE 301 taught by Professor Jimbrau during the Winter '12 term at BYU.

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05 TVM - handout - Ch. 5 - The Time Value of Money Ch. 5 -...

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