Download Document
Showing pages : 1 - 15 of 60
This preview has blurred sections. Sign up to view the full version! View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 4-1McGraw-Hill/IrwinCopyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.Time value of moneyA dollar today is worth more than a dollar tomorrowWhy?Default riskInflationOpportunity costDiscount rates help us value future cash flows today4-3Basic DefinitionsPresent Value (PV)The current value of future cash flows discounted at the appropriate discount rateValue at t=0 on a time lineFuture Value (FV)The amount an investment is worth after one or more periods.Later money on a time line4-4Basic DefinitionsInterest rate(r)Discount rateCost of capitalOpportunity cost of capitalRequired returnTerminology depends on usage4-5Time Line of Cash FlowsCF3CFCF1CF2123r%Tick marksat ends of periodsTime 0 is today; Time 1 is the endof Period 1+CF = Cash INFLOW -CF = Cash OUTFLOW PMT = Constant CF4-6Time Line for a $100 Lump Sum due at the End of Year 2.10012 Yearr%4-7Future Values: General FormulaFV = PV(1 + r)tFV = future valuePV = present valuer = period interest rate, expressed as a decimalt = number of periodsFuture value interest factor = (1 + r)tNote: yx key on your calculator4-8Future Values Example 1Suppose you invest $100 for one year at 10% per year. What is the future value in one year?Interest = 100(.10) = 10Value in one year = Principal + interest = 100 + 10 = 110Future Value (FV) = 100(1 + .10) = 1104-9Future Values Example 1Suppose you leave the money in for another year. How much will you have two years from now?FV = 100(1.10)(1.10) = 100(1.10)2= 121.004-10Effects of CompoundingSimple interest Interest earned only on the original principalCompound interestInterest earned on principal and on interest receivedInterest on interest interest earned on reinvestment of previous interest payments4-11Effects of CompoundingConsider the previous exampleFV w/simple interest = 100 + 10 + 10 = 120FV w/compound interest =100(1.10)2= 121.00 The extra 1.00 comes from the interest of .10(10) = 1.00 earned on the first interest payment4-12Texas Instruments BA-II Plus= future value= present value= period interest rate (r)= number of periodsOne of these MUST be negative4-13Texas Instruments BA-II Plus= period interest rate (r)must equal 1 for theto be the period rate (= 1 = default on new BAII+)Interest is entered as a percent, not a decimal5% interest = 5, not .05= 0 for this chapter only!Clear the registers before each problemOr reenter each field4-14Set number of decimal places to display Press key, Press key (above .), Enter desired decimal places (e.g., 4)....
View Full Document