Introduction to Valuation: The Time Value of Money

Introduction to Valuation: The Time Value of Money

4.1 Chapter 12a McGraw-Hill/Irwin Introduction to Valuation: The Time Value of Money 2001 The McGraw-Hill Companies All Rights Reserved 4.2 Basic Definitions Present

Value earlier money on a time line Future Value later money on a time line Interest rate exchange rate between earlier money and later money Discount rate Cost of capital Opportunity cost of capital Required return McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved 4.3 Future Values: General Formula FV

= PV(1 + r)t FV = future value PV = present value r = period interest rate, expressed as a decimal T = number of periods Future value interest factor = (1 + r)t McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved 4.4 Future Values

Suppose you invest $1000 for one year at 5% per year. What is the future value in one year? Suppose you leave the money in for another year. How much will you have two years from now? McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved 4.5 Effects of Compounding Simple

interest Compound interest Consider the previous example FV with simple interest = 1000 + 50 + 50 = 1100 FV with compound interest = 1102.50 The extra 2.50 comes from the interest of .05(50) = 2.50 earned on the first interest payment McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved 4.6 Future Value as a General Growth Formula

Suppose your company expects to increase unit sales of widgets by 15% per year for the next 5 years. If you currently sell 3 million widgets in one year, how many widgets do you expect to sell in 5 years? McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved 4.7 Quick Quiz Part 1 What is the difference between simple interest and compound interest?

Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 15 years. How much would you have at the end of 15 years using compound interest? How much would you have using simple interest? McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved 4.8 Present Values How much do I have to invest today to have some amount in the future?

FV = PV(1 + r)t Rearrange to solve for PV = FV / (1 + r)t When we talk about discounting, we mean finding the present value of some future amount. When we talk about the value of something, we are talking about the present value unless we specifically indicate that we want the future value. McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved Present Value One Period Example 4.9

Suppose you need $10,000 in one year for the down payment on a new car. If you can earn 7% annually, how much do you need to invest today? McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved 4.10 Present Values Example 2 You want to begin saving for you daughters college education and you estimate that she

will need $150,000 in 17 years. If you feel confident that you can earn 8% per year, how much do you need to invest today? McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved Present Value Important Relationship I 4.11 For a given interest rate the longer the time period, the lower the present value What

is the present value of $500 to be received in 5 years? 10 years? The discount rate is 10% 5 years: PV = 310.46 10 years: PV = 192.77 McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved Present Value Important Relationship II 4.12 For a given time period the higher the interest rate, the smaller the present value What

is the present value of $500 received in 5 years if the interest rate is 10%? 15%? Rate = 10%: PV = 310.46 Rate = 15%; PV = 248.58 McGraw-Hill/Irwin 2001 The McGraw-Hill Companies All Rights Reserved

Recently Viewed Presentations

  • An Introduction to Autism Spectrum Disorders

    An Introduction to Autism Spectrum Disorders

    Sabotage the environment! Create circumstances which stimulate communication. For example, hide Sarah's favorite drum in the closet, "forget" to pour Justin's juice at snack time, "lose" Tommy's knapsack before it's time to go home, or give Ashley the incorrect amount...
  • Chapter 1 Marketing: Creating and Capturing Customer Value

    Chapter 1 Marketing: Creating and Capturing Customer Value

    is typically practiced with unsought goods—those that buyers do not normally think of buying, such as insurance or blood donations. These industries must be good at tracking down prospects and selling them on a product's benefits. Such aggressive selling, however,...
  • Cisco Presentation Guide

    Cisco Presentation Guide

    On the Road Making Airport Public Spaces More Valuable to Mobile Professionals
  • Summary of the 9th International Symposium on Naturally

    Summary of the 9th International Symposium on Naturally

    Case Study: ORPAS Peer review and how NORM is covered. Information Exchange Platforms (ORPNET/UMEX/NORMEX) Introduction to Development of IAEA Safety Standards for NORM Residues Management. Origin and Characterization of NORM Residues. Regulatory Framework in Graded Approach. Strategy of NORM Residues...
  • Imagery - Issaquah Connect

    Imagery - Issaquah Connect

    Villanelles didn't start out as rigid poetry with fixed rules! Started in France, but didn't become popular until English poets claimed the structure and made it their own. ... Sonnet. You've already read a sonnet! The very first poem we...
  • So what exactly is the International Baccalaureate?

    So what exactly is the International Baccalaureate?

    The International Baccalaureate (IB) is a not-for-profit* foundation, motivated by its mission to create a better world through education" ... Focus on Ways of Knowing-sensory perception, memory, reason, emotion, faith, etc. Sample Prescribed Titles. 1.
  • Sequel - Amazon S3

    Sequel - Amazon S3

    Norms Crisis. Students and employees: will rely on the norms they know. will watch each other's response to determine the norms. will demonstrate anxiety if the norms are not clear or not modeled. The informal norms are the real norms....
  • MUSCLE W Beresford MUSCLE CONTRACTION: Requirements MUSCLE CONTRACTION:

    MUSCLE W Beresford MUSCLE CONTRACTION: Requirements MUSCLE CONTRACTION:

    " MUSCLE CONTRACTION: Requirements GENERATED by interactions between actin & myosin Applied usefully connective tissues to tendons; visceral & cardiac muscle contract in a circle CONTROLLED voluntary & involuntary: nervous; & nervous + diffuse chemical control ENERGIZED blood supply; mitochondria...