Session 6 TVM1

Session 6 TVM1 - BM 301 Introduction to Finance A little...

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Unformatted text preview: BM 301 Introduction to Finance A little something for our wonderful Asian students Why?: Most long-term project 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. Learning objective: Develop an understanding of how time impacts the value of cash flows Quantify the time/value relationship Evaluate complex financial contracts/projects 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! Suppose that I offered to give you a dollar (emphasis on suppose ) Would you rather have the dollar today or one year from today? Why? Risk Opportunity Inflation You win a $100,000,000 lottery! Problem: one year until you get the $$$. What is the least you would take today in exchange for the $100,000,000 next year? A. $50,000,000? B. $70,000,000? C. $87,500,000? D. $95,000,000? E. $99,999,999? Translate $1 today into its equivalent in the future . Future Future Value Present Value Future Translate $1 in the future into its equivalent today . Compounding Discounting Now Future Its 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. 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 1 PV = PV = FV = FV = 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? 1 1 PV = -100 PV = -100 FV = FV = 106 106 Negative indicates you put money in 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?...
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This note was uploaded on 04/05/2012 for the course BUS M 301 taught by Professor Jimbrau during the Fall '11 term at BYU.

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Session 6 TVM1 - BM 301 Introduction to Finance A little...

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