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Financial Management ACCG253 Lecture 1

Financial Maths and Debt Valuation
Authors: Keith Woodward and Damian Bridge
Revised: 25.2.12

Present Value of a Single Cash Flow

Where: cash flow at time t. time periods. the effective rate over a single period.

Not to be reproduced without the permission of the authors.

1-2

Calculation Example: Present Value of a Single Cash Flow
Question: What is the present value of $100 received in 5 years when interest rates are 8% pa? Answer:

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Future Value of a Single Cash Flow
Where: cash flow now. time periods into the future. the effective rate over a single period.

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Calculation Example: Future Value of a Single Cash Flow
Question: You have $100 in the bank. Interest rates are 8% pa. How much will you have in the bank after 5 years? Answer:

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1-5

Calculation Example: Present and Future Values
Question: If you pay this year's uni fees of $5,000 now, you will receive a 25% discount. Otherwise you incur interest on your $5,000 debt at the rate of inflation which is expected to be 2.5% pa. You can lend and borrow from the bank at a rate of 8% pa, and you expect to start work and have to pay off all of your debt in a single payment in 6 years. Should you pay your fees now or in 6 years?

Not to be reproduced without the permission of the authors.

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Answer: Option 1: Pay your uni fees in 6 years: The future value of the uni fees in 6 years, growing at the inflation rate of 2.5% pa will be:

The present value of this payment at the bank interest rate of 8% pa is:

Not to be reproduced without the permission of the authors.

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Option 2: Pay your uni fees now: If you pay your fees now

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