Compound Interest 2. Continuous Money Flow: Total money flow, present value, accumulated amount of money, continuous deposits. 3. Annuities 4. Amortizations and Sinking Funds Assoc. Prof. Nguyen Dinh Dr. Nguyen Ngoc Hai CALCULUS 2 (BA) Simple and compound interest • If you borrow money you have to pay interest on it. If you invest money in a deposit account you expect to earn interest on it. Interest can be interpreted as money paid for the use of money. • The original amount borrowed
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Net Present Value (NPV) and Internal Rate of Return (IRR). The procedures used to arrive at this conclusion are laid out step by step. Although some assumptions are made before the final conclusion, this financial analysis assumes the nature of real-time estimation of any investment which future yields matter a lot. Introduction One of the methods to preserve the value of capital is by investing it in a particular project.
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2 Valuation 3 The Time Value of Money Contents n n n Objectives After studying Chapter 3, you should be able to: n The Interest Rate Simple Interest Compound Interest Single Amounts • Annuities • Mixed Flows Understand what is meant by “the time value of money.” Understand the relationship between present and future value. Describe how the interest rate can be used to adjust the value of cash flows – both forward and backward – to a single point in time. Calculate both the future
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Chapter 02 How to Calculate Present Values Multiple Choice Questions 1. The present value of $100 expected in two years from today at a discount rate of 6% is: A. $116.64 B. $108.00 C. $100.00 D. $89.00 2. Present Value is defined as: A. Future cash flows discounted to the present at an appropriate discount rate B. Inverse of future cash flows C. Present cash flow compounded into the future D. None of the above 3. If the interest rate is 12%, what is the 2-year discount factor?
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Time value money: You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years. You expect annual interest rates will be 8 percent over that time period. The maximum price you would be willing to pay for the annuity is closest to $32,000. $39,272. $40,000. $80,000. 2. With continuous compounding at 10 percent for 30 years, the future value of an initial investment of $2,000 is closest to $34,898. $40,171. $164,500. $328,282. 3. In 3 years you
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assumes that the payment is equal in each period and this now a nurture of the cash flow. The present value of an annuity formula assumes equal cash flows at each time period. However, sometimes cash flows are not even. Learn how to use a formula to calculate the present value of uneven future cash flows. An annuity is an asset that will pay equal amounts of money at regular time periods over its life. Essentially, an annuity can be thought of as a security with equal expected cash flows usually
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Chapter 6 TIME VALUE OF MONEY Alex Tajirian Time Value of Money 6-2 1. OBJECTIVE # Derive a valuation (pricing) equation based on cash flow (amount, timing, & risk). Time Value of Money analysis involves: ! ! What is $1 worth 10 years from today (Future Value)? What is $1 to be received in 10 years worth today (Present Value)? # # Applications ! ! ! ! ! ! ! Loan amortization stated vs. effective interest charged rebate vs. low financing pricing of bonds (Chapter 7) pricing
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future value measures the value at a specific period of time. Present value represents the value of an investment at the beginning of the investment period. For example, what the worth is currently would represent what the value would be today. Future value represents the value of an investment at the end of the investment period. For example, what the worth is in the future would represent what the value would be in specific amount of time. These values each provide techniques in preparing a financial
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Present Value is the process of determining what a cash flow to be received in the future is worth in today's dollars. Therefore, the Present Value of a future cash flow represents the amount of money today which, if invested at a particular interest rate, will grow to the amount of the future cash flow at that time in the future. The process of finding present values is called “Discounting” and the interest rate used to calculate present values is called the “discount rate”. Thus, the Present Value is
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TUTORIAL QUESTIONS (TIME VALUE OF MONEY) QUESTION 1 If you have a choice to earn simple interest on RM10,000 for three years at 8% or compound interest at 7.5% for three years, which one will pay more and by how much? QUESTION 2 If you wish to accumulate RM140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%? QUESTION 3 At what annual interest rate must RM124,925 be invested so that it will grow to be RM475,000 in 14 years? QUESTION
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