Chapter 02_TimeValueMoney

Chapter 02_TimeValueMoney - CHAPTER 2 Time Value of Money...

Info iconThis preview shows pages 1–15. Sign up to view the full content.

View Full Document Right Arrow Icon
    2-1 CHAPTER 2 Time Value of Money Future value Present value Annuities Rates of return Amortization
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2-2 Time lines Show the timing of cash flows. Tick marks occur at the end of periods, so  Time 0 is today; Time 1 is the end of the  first period (year, month, etc.) or the  beginning of the second period. CF 0 CF 1 CF 3 CF 2 0 1 2 3 I%
Background image of page 2
2-3 Drawing time lines 100 100 100 0 1 2 3 I% 3 year $100 ordinary annuity 100 0 1 2 I% $100 lump sum due in 2 years
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2-4 Drawing time lines 100  50  75 0 1 2 3 I% -50 Uneven cash flow stream
Background image of page 4
2-5 What is the future value (FV) of an initial  $100 after 3 years, if I/YR = 10%? If a deposit is made into an account TODAY  earning compound annual interest, how much will  this be worth at the end of three years? Finding the FV of a cash flow or series of cash  flows is called  compounding . FV can be solved by using the step-by-step,  financial calculator, and spreadsheet methods. FV = ? 0 1 2 3 10% 100
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2-6 Solving for FV: The step-by-step and  Formula  methods After 1 year: FV 1  = PV (1 + I) = $100 (1.10)       = $110.00 After 2 years: FV 2  = PV (1 + I) = $100 (1.10) 2       =$121.00 After 3 years: FV 3  = PV (1 + I) = $100 (1.10) 3       =$133.10 After N years (general case): FV N  = PV (1 + I) N
Background image of page 6
2-7 Future Value Calculation FV N  = PV (1 + I) N
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2-8 FV Problem If you deposit $10,000 in a bank  account that pays 10 percent compound  annual interest, how much would be in  your account after 5 years? Draw the cash flow line: Solve Using the FV formula:
Background image of page 8
2-9
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2-10 Solving for FV: The calculator method Solves the general FV equation. Requires 4 inputs into calculator, and will  solve for the fifth. (Set to P/YR = 1 and  END mode.) INPUTS OUTPUT N I/YR PMT PV FV 5 10 0 $16,105.10 -10,000
Background image of page 10
2-11 Excel Solution Financial Functions
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2-12 PV = ? 100 What is the PRESENT VALUE (PV) of  $100 due in 3 years, if I/YR = 10%? Finding the PV of a cash flow or series of  cash flows is called  discounting  (the  reverse of compounding). The PV shows the value of cash flows in  terms of today’s purchasing power. 0 1 2 3 10%
Background image of page 12
2-13 Solving for PV: The formula method Solve the general FV equation for PV: PV = FV N  / (1 + I) N PV = FV 3  / (1 + I) 3      = $100 / (1.10) 3      = $75.13
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2-14 Solving for PV: The calculator method Solves the general FV equation for PV. Exactly like solving for FV, except we  have different input information and are  solving for a different variable.
Background image of page 14
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/10/2012 for the course CHFS 250 taught by Professor Darnt during the Spring '08 term at University of Tennessee.

Page1 / 47

Chapter 02_TimeValueMoney - CHAPTER 2 Time Value of Money...

This preview shows document pages 1 - 15. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online