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chapter04 - Part 2 Important Financial Concepts Chapter 4...

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2 Important Financial Concepts Part Chapter 4 Time Value of Money Chapter 5 Risk and Return Chapter 6 Interest Rates and Bond Valuation Chapter 7 Stock Valuation
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130 Time Value of Money Chapter Across the Disciplines Why This Chapter Matters To You Accounting: You need to understand time-value-of-money calculations in order to account for certain transactions such as loan amortization, lease payments, and bond interest rates. Information systems: You need to under- stand time-value-of-money calculations in order to design systems that optimize the firm’s cash flows. Management: You need to understand time-value-of-money calculations so that you can plan cash collections and dis- bursements in a way that will enable the firm to get the greatest value from its money. Marketing: You need to understand time value of money because funding for new programs and products must be justified financially using time-value-of-money techniques. Operations: You need to understand time value of money because investments in new equipment, in inventory, and in pro- duction quantities will be affected by time- value-of-money techniques. 4 LEARNING GOALS Discuss the role of time value in fi- nance, the use of computational tools, and the basic patterns of cash flow. Understand the concepts of future and present value, their calculation for single amounts, and the relation- ship of present value to future value. Find the future value and the present value of an ordinary annuity, and find the present value of a perpetuity. Calculate both the future value and the present value of a mixed stream of cash flows. Understand the effect that compound- ing interest more frequently than annually has on future value and on the effective annual rate of interest. Describe the procedures involved in (1) determining deposits to accumu- late a future sum, (2) loan amortiza- tion, (3) finding interest or growth rates, and (4) finding an unknown number of periods. LG6 LG5 LG4 LG3 LG2 LG1
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CHAPTER 4 Time Value of Money 131 The Role of Time Value in Finance Financial managers and investors are always confronted with opportunities to earn positive rates of return on their funds, whether through investment in attractive projects or in interest-bearing securities or deposits. Therefore, the tim- ing of cash outflows and inflows has important economic consequences, which financial managers explicitly recognize as the time value of money. Time value is based on the belief that a dollar today is worth more than a dollar that will be received at some future date. We begin our study of time value in finance by con- sidering the two views of time value—future value and present value, the compu- tational tools used to streamline time value calculations, and the basic patterns of cash flow.
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