TVM___handouts

# TVM___handouts - Ch 5 The Time Value of Money Ch...

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Ch. 5 - The Time Value of Money Ch. 5 - The Time Value of Money Compounding and Discounting Single Sums

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You’ve won the lottery!!! \$1,000,000 You win a \$1,000,000 lottery! Problem: one year until you get the \$\$\$. What would you take today in exchange for the \$1,000,000 in the future???
We know that receiving \$1 today is worth more than \$1 in the future. This is due to Opportunity Cost, Risk, and inflation.OPPORTUNITY COSTS, RISK, AND INFLATION . The opportunity cost of receiving \$1 in the future is the interest we could have earned if we had received the \$1 sooner.

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If we can MEASURE this If we can MEASURE this opportunity cost, we can: opportunity cost, we can: ? Translate \$1 today into its equivalent in the future (COMPOUNDING).
If we can MEASURE this If we can MEASURE this opportunity cost, we can: opportunity cost, we can: Translate \$1 today into its equivalent in the future (COMPOUNDING). Translate \$1 in the future into its equivalent today (DISCOUNTING). ? ? Today Future Today Future

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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

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Future Value - single sums If you deposit \$100 in an account earning 6%, how much would you have in the account after 1 year? 0 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 = \$106 Notice that there is one equation and four variables. What does this tell you about how much information you need????? 0 0 1 1 PV = -100 PV = -100 FV = FV = 106 106

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HOW ABOUT WITH THE CALCULATOR? There is one equation and 4 variables So, how many unknowns can you have? I (or r), PV, FV, and n For almost all TVM problems, you simply play a “4 find 3” game Three steps: 1) set-up your calculator, 2) enter the 3 known variables, and 3) solve for the unknown
Half of you will lose points on the exam because you ignore this slide!! Two problems Pmts per year: I will do all calculations in 1 P/Yr mode. Set-up your calculator before each problem

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Future Value - single sums If you deposit \$100 in an account earning 6%, how much would you have in the account after 1 year? Calculator Solution: P/Y = 1 I = 6 N = 1 PV = -100 FV = \$106 0 0 1 1 PV = -100 PV = -100 FV = FV = 106 106
If you deposit \$100 in an account earning 6%, how much would you have in the account after 5 years? 0 0 5

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## This note was uploaded on 03/06/2012 for the course BUS M 201 taught by Professor Mcgregor during the Fall '11 term at BYU.

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TVM___handouts - Ch 5 The Time Value of Money Ch...

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