5284 Words22 Pages

12/9/2012
Chapter 9 The Time Value of Money
1
Chapter 9- Learning Objectives
Identify various types of cash flow patterns (streams) that are observed in business. Compute (a) the future values and (b) the present values of different cash flow streams, and explain the results. Compute (a) the return (interest rate) on an investment (loan) and (b) how long it takes to reach a financial goal. Explain the difference between the Annual Percentage Rate (APR) and the Effective Annual Rate (EAR), and explain when each is more appropriate to use. Describe an amortized loan, and compute (a) amortized loan payments and (b) the balance (amount owed) on an amortized loan at a specific point during its life.
Principles of Finance*…show more content…*

After 3 years: FV3 = PV(1 + r)3 = $700 (1.10)3 = $931.70 After 2 years: FV2 = PV(1 + r)2 = $700 (1.10)2 = $847.00. In general, FVn = PV (1 + r)n Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Three Ways to Solve Time Value of Money Problems Use Equations Use Financial Calculator Use Electronic Spreadsheet Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 5 12/9/2012 Numerical (Equation) Solution FVn = PV(1+ r)n PV = $700, r = 10%, and n =3 FVn = $700(1.10)3 = $700(1.3310) = $931.70 Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Financial Calculator Solution FVn = PV(1+ r)n There are 4 variables. If 3 are known, the calculator will solve for the 4th. Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or

After 3 years: FV3 = PV(1 + r)3 = $700 (1.10)3 = $931.70 After 2 years: FV2 = PV(1 + r)2 = $700 (1.10)2 = $847.00. In general, FVn = PV (1 + r)n Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Three Ways to Solve Time Value of Money Problems Use Equations Use Financial Calculator Use Electronic Spreadsheet Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 5 12/9/2012 Numerical (Equation) Solution FVn = PV(1+ r)n PV = $700, r = 10%, and n =3 FVn = $700(1.10)3 = $700(1.3310) = $931.70 Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Financial Calculator Solution FVn = PV(1+ r)n There are 4 variables. If 3 are known, the calculator will solve for the 4th. Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or

Related

## Time Value of Money

1028 Words | 5 Pagestoward understanding the relationship between the value of dollars today and that of dollars in the future is by looking at how funds invested will grow over time. This understanding will allow one to answer such questions as; how much should be invested today to produce a specified future sum of money? Time Value of Money In most cases, borrowing money is not free, unless it is a fiver for lunch from a friend. Interest is the cost of borrowing money. An interest rate is the cost stated as a percent

## Time Value of Money

1033 Words | 5 PagesTime Value of Money (TVM), developed by Leonardo Fibonacci in 1202, is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM is based on the concept that a dollar today is worth more than a dollar in the future. That is mainly because money held today can be invested and earn interest. A key concept of TVM is that a single sum of money or a series of equal,

## Time Value of Money

2180 Words | 9 PagesFinance Time Value of Money We earn money to spend it and we save money to spend it in the future. However, for most people spending money in the present time is more desirable since the future is unknown. We can gratify the desire to spend money today rather than in the future by knowing the basic law in finance time value of money. This means that a dollar today is worth more than a dollar at some time in the future. Unfortunately, people very often want to buy things at the present time which

## Time Value of Money

967 Words | 4 PagesTime Value of Money The time value of money relates to many activities and decision in the financial world. “Understanding the effective rate on a business loan, the mortgage payment in a real estate transaction, or the true return on an investment depends on understanding the time value of money” (Block, Hirt, 2005). The concept of time value of money helps determine how financial assets are valued and how investors establish the rates of return they demand. Many different types of companies

## Time Value of Money

3904 Words | 16 PagesTime Value of Money Problems 1. What will a deposit of $4,500 at 10% compounded semiannually be worth if left in the bank for six years? a. $8,020.22 b. $7,959.55 c. $8,081.55 d. $8,181.55 2. What will a deposit of $4,500 at 7% annual interest be worth if left in the bank for nine years? a. $8,273.25 b. $8,385.78 c. $8,279.23 d. $7,723.25 3. What will a deposit of $4,500 at 12% compounded monthly be worth at the end of 10 years? a. $14,351.80 b. $14,851.80 c. $13,997.40 d. $14

## Time Value of Money

2092 Words | 9 PagesTime Value of Money The time value of money (TVM) or, discounted present value, is one of the basic concepts of finance and was developed by Leonardo Fibonacci in 1202. The time value of money (TVM) is based on the premise that one will prefer to receive a certain amount of money today than the same amount in the future, all else equal. As a result, when one deposits money in a bank account, one demands (and earns) interest. Money received today is more valuable than money received in the future

## Time Value of Money

2124 Words | 9 PagesTime Value of Money: Simple Interest versus Compound Interest Outline I. Applications of Time Value of Money 1.1 Example One 1.2 Example Two 2. Interest 2.1 What is Interest? 2.2 Three Variables of Interest 1. Principal 2. Interest Rate 3. Time 2.3 Why is Interest Charged? 3. Simple Interest 3.1 What is Simple Interest? 3.2 Simple Interest Formula 4. Compound Interest 4.1 What is Compound Interest? 4.2 Compound Interest Formula

## Time Value of Money

712 Words | 3 PagesTVM Assignment 1. $5,500 deposited four years ago has grown to $7,000. What semiannual compounded rate of interest has the bank been paying you? PV = 5,500 N = 4 x 2 = 8 Pmt = - FV = 7,000 I = 3.06% 2. The Costanza Resort borrowed $125,000 from the Ross Bank to pay for a new air conditioning system. The loan is for a period of 5 years at an interest rate of 10% and requires 5 equal end-of-year payments that include both principal and interest on the outstanding balance. What will

## Time Value of Money and Present Value

1154 Words | 5 Pagesrate is 5.5 percent. How much money must you deposit in account each year to fund your children’s education? Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. Assume four years of college Solution: Cost of 1 year at university = 23,000 N=4 I=5.5% PMT=23,000 CPT PV =

## Time Value Of Money Essay

1875 Words | 8 PagesTime Value of Money The time value of money serves as the foundation for all other notions in finance. It affects business finance, consumer finance and government finance. Time value of money results from the concept of interest. The idea is that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is

### Time Value of Money

1028 Words | 5 Pages### Time Value of Money

1033 Words | 5 Pages### Time Value of Money

2180 Words | 9 Pages### Time Value of Money

967 Words | 4 Pages### Time Value of Money

3904 Words | 16 Pages### Time Value of Money

2092 Words | 9 Pages### Time Value of Money

2124 Words | 9 Pages### Time Value of Money

712 Words | 3 Pages### Time Value of Money and Present Value

1154 Words | 5 Pages### Time Value Of Money Essay

1875 Words | 8 Pages