6BUSI408 - TVM

# 6BUSI408 - TVM - BUSI 408 Corporate Finance Spring 2012...

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Chip Snively [email protected] Class 6, 7, 8 BUSI 408 Corporate Finance Spring 2012

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2 Read RWJ4 – Time Value of Money Same PPT deck for next 3 classes Start working text HW problems Review formulas in the text I’d suggest making a “cheat sheet” now The exercise will help get you familiar with the formulas and terminology Next Class
3 One-Period Case If you were to invest \$10,000 at 5-percent interest for one year, your investment would grow to \$10,500 \$500 would be interest (\$10,000 × .05) \$10,000 is the principal repayment (\$10,000 × 1) \$10,500 is the total due. It can be calculated as: \$10,500 = \$10,000×(1.05) The total amount due at the end of the investment is called the Future Value ( FV )

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4 Future Value In the one-period case, the formula for FV can be written as: FV = C 0×(1 + r ) Where C 0 is cash flow today (time zero), and r is the appropriate interest rate
5 Present Value If you were to be promised \$10,500 due in one year when interest rates are 5-percent, your investment would be worth \$10,000 in today’s dollars The amount that a borrower would need to set aside today to be able to meet the promised payment of \$10,000 in one year is called the Present Value ( PV ). Note: \$10,500 = \$10,000×(1.05) 05 . 1 500 , 10 \$ 000 , 10 \$ =

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6 Present Value In the one-period case, the formula for PV can be written as: Where C 1 is cash flow at date 1, and r is the appropriate interest rate. r C PV + = 1 1
7 Net Present Value The Net Present Value ( NPV ) of an investment is the present value of the expected cash flows, less the cost of the investment Suppose an investment that promises to pay \$10,000 in one year is offered for sale for \$9,500. Your interest rate is 5% Should you buy?. ..two ways to look at it. .

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8 Net Present Value The present value of the \$10k future cash inflow is greater than the present value cost. In other words, the Net Present Value (NPV) is positive, so the investment should be purchased 81 . 23 \$ 500 , 9 \$ 81 . 523 , 9 \$ 500 , 9 \$ 05 . 1 000 , 10 \$ = - = - = NPV NPV NPV
9 Net Present Value In the one-period case, the formula for NPV is: NPV = PV - Cost If we had not undertaken the positive NPV project considered on the last slide, and instead invested our \$9,500 elsewhere at 5 percent, our FV would be less than the \$10,000 the investment promised, and we would be worse off in FV terms : \$9,500×(1.05) = \$9,975 < \$10,000

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10 The Multi-period Case The general formula for the future value of an
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## This note was uploaded on 02/27/2012 for the course BUSI 407 taught by Professor Bowen during the Spring '11 term at UNC.

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6BUSI408 - TVM - BUSI 408 Corporate Finance Spring 2012...

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