5BUSI408TR Snively - TVM1

# 5BUSI408TR Snively - TVM1 - BUSI 408 Corporate Finance Fall...

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Chip Snively Chip_snively@unc.edu Class 5 BUSI 408 Corporate Finance Fall 2011

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2 HW/Next Class Market Update Time Value of Money Agenda
3 Read RWJ4 – Time Value of Money We’ll use same PPT deck for next class Homework RWJ4: Q – 1,3,5; P – 1,2,3,15,16,21 Next Class

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4 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 call the Future Value ( FV )
5 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

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6 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 \$ =
7 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

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8 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?
9 Net Present Value The present value of the cash inflow is greater than the 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

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10 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
11 The Multi-period Case The general formula for the future value of an investment over many periods can be written as:

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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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5BUSI408TR Snively - TVM1 - BUSI 408 Corporate Finance Fall...

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