311 ch5 - Time Value of Money (An Introduction) Chapter 5...

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Time Value of Money (An Introduction) Chapter 5
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What is Time Value of Money? A dollar received today is worth more than a dollar received at some point in the future. You can spend it without having to wait or you can invest it and spend even more later Time Value of Money relates interest rates, initial and final values of cash flows
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Why use TVM? We use TVM to value securities select investment projects (capital budgeting) determine cost of capital (FIN 312) manage working capital (FIN 312) analyze leases vs. purchases (FIN 312) Personal Finance: home mortgages, paying off credit cards, saving for retirement
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Notation i Interest Rate per period n Number of Periods PMT Cash payments made each period PV Present Value (start of stream) FV Future Value (end of stream) t Time k, r Required Rate of Return (i)
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Simple Interest What is the simple interest per period on $100 at 10%/year for 6 months? I = PV x i x n I = $100 x 0.10 x 6/12 I = $5 I = PV x i x n Interest Rate = Principal x Interest Rate x Periods
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If you took a $10,000 loan at 1%/month, how much interest would you pay in the first month? I = PV x i x n I = I = I = In the first year? I = I =
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If you get $75 in interest every six months from an account that pays 2%/month, how much principal do you have in the account? I = PV x i x n PV = I / (i x n) PV = PV = Notice that you are not earning interest on interest received in previous periods
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If you put $500 into an account that pays 6%/year, how much money would you have in the account after 12 years? I = PV x i x n
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This note was uploaded on 04/08/2008 for the course FINANCE 311 taught by Professor Bradley during the Spring '08 term at Clemson.

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311 ch5 - Time Value of Money (An Introduction) Chapter 5...

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