Summary In chapter 9 we learned the 9 different formulas, for time value of money. 1. Future value of a single amount a. FV = PV X FVIF 2. Present value of a single amount b. PV = FV X PVIF c. This is to determine the present value of an amount to be received in the future. 3. Future value of an annuity d. FVA = A X FVIFA e. To determine the future value of a series of consecutive, equal payments (an annuity). 4. Present value of an annuity
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Time Value of Money Extra Problem Set 1 1. You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to draw out of your savings at the rate of $10,000 per year. How much would you have to pay in equal annual deposits until retirement to meet your objectives? Assume interest remains at 9%. [$1254] 2. You can deposit $4000 per year into an account that pays 12% interest. If you deposit such amounts for 15 years and start drawing money out of
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Implies that the amount regularly paid to discharge an obligation is of equal size Note: in finding the size of the periodic payment, one of the most important factors to consider is whether the loan is due now or later The concept of amortization is applicable if the loan or financial obligation due now Finding the Size of Each Payment The size of the periodic payment to settle a debt is highly dependent on the time the payment is made. For ordinary annuity ������ ������ = ������ 1 − 1
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© Nikada/iStockphoto.com Chapter 28 Time Value of Money © Cengage Learning. All rights reserved. No distribution allowed without express authorization. In Chapter 1, we saw that the primary objective of financial management is to maximize the intrinsic value of a firm’s stock. We also saw that stock values depend on the timing of the cash flows investors expect from an investment—a dollar expected sooner is worth more than a dollar expected further in the future. Therefore, it is essential
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of debt that you have, the less you have to in each payment. Finally when the number of payments changes, it effects the amount that you’d have to pay in each payment as well. For example, if you decide to pay your debt in a longer period of time, obviously you would not have to pay as much. 2/ In this problem, beside Present Value issue, the Future Value issue is what we also have to deal with. Therefore, along with the Present Value equation that I used in the first problem, the Future
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Financial Analysis & Management Discounted cash flow techniques Discounted cash flow is a method used to evaluate a company based on the concept of time value of money, cash flows of the future are estimated then discounted to their present value, There are four discounted cash flow techniques which are; Net present value technique(N.P.V), Internal rate of return technique(I.R.R), Discounted payback technique and The profitability index technique (P.I) and every one of those techniques
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lottery which gives you two options: (1) Receive $100 today (2) Receive $120 in one year $100 $120 0 Money Time 1 Which option should one take? 4 2 2 Lottery Example: Future Value If you take money now, you can put them in the bank at the current interest rate “r” of 5%, and have the following amount in one year: V0=$100 0 Money Time V1=$105 1 The amount in one year – future value (FV) – is calculated as FV = Principal + r × Principal = $100
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Financial Management Lecture 1 Corporate Finance/Financial Decisions: Three important steps. * The Investment Decision: Expand, selling and so on. Decisions to spend or earn money. Capital budgeting. Capital budgeting is the planning and managing of a firms investment in non-current assets. The main thing is the cash flow. Evaluating; * Size of future cash flows * Timing of future cash flows * Risk to future cash flows. Cash flow timing is when a dollar today
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participate in financial markets. We will show how people compare different sums of money at different points in time, how they manage risk, and how these concepts combine to help determine the value of a financial asset, such as a share of stock. KEY POINTS: Because savings can earn interest, a sum of money today is more valuable than the same sum of money in the future. A person can compare sums from different times using the concept of present value. The present value of any future sum is the
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percentage rate. An example of this is Kim is taking out a loan on a house and the annual percentage rate is 4.2%. A different example would be Lisa is taking out a loan on a car and the annual percentage rate is 2.99%. A third example is Travis deposited money into his savings account accumulating interest at a rate of 2.8% semi-annually. 2. Computing loan payments and balances requires that the quoted rates match up with the number of periods. One example is buying something on a credit card. The annual
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