Week 2 FIN921 Lecture Slides - Wollongong

FIN921
Managerial Finance
Week 2
Tr imester 1, 2016
Wollongong
Time value of money

Chapter 4 & 5
VISIONARY / PASSIONATE / DYNAMIC
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Learning objectives
4.1 Determine the future value of an
investment made today.
4.2 Determine the present value of cash to
be received at a future date.
4.3 Calculate the return on an investment.
4.4 Predict how long it will take for an
investment to reach a desired value.
Solve time value of money problems using
formulas; a financial calculator; a
spreadsheet.
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4-2
Basic definitions
Present value
(PV)
The current value of future cash flows

discounted at the appropriate discount rate.
Future value
(FV)
The amount an investment is worth after one

or more periods.
Interest rate (r)

Discount rate, Cost of capital, Opportunity
cost of capital, Required return
Terminology depends on usage
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4-3
Future values: general

formula
FV = PV(1 + r)t
FV = Future value
PV = Present value
r = Period interest rate, shown as decimal
t = Number of periods
Future value interest factor = (1 + r)t

Calculator note: yx key

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4-4
Timeline of cash flows

Tick marks at ends of periods
Time 0 is today
Time 1 is the end of Period 1
r%
CF0
CF1
CF2
+CF = Cash INFLOW CF = Cash OUTFLOW

Constant CF
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PMT =
Timeline for a $100 lump

sum due at the end of Year
2
0
r%
Year
100
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4-6
Future values: Example

1a
Investing for a single period

Suppose you invest $100 for one year
at 10% (r) per year.
What is the future value in one year?
Interest = 100(0.1) = $10
Value in one year = principal + interest
= 100 + 10 = $110
Future value (FV) = 100(1 + 0.1) = $110
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4-7
Future values: Example

1b
Investing for more than one period
Suppose you leave the money in for
another year.
How much will you have two years from
now?
FV = 100(1.1)(1.1)
= 1000(1.1)2
= $121
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Future values: Effects of

compounding
Simple interest
Interest earned only on the original principal
Compound interest
Interest earned on principal and on interest
received
Interest on interest
interest earned on reinvestment of previous
interest payments
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4-9
Future values:
Effects of compounding
Consider the previous example:
FV w/simple interest
= 100 + 10 + 10 = 120
FV w/compound interest
=100(1.10)2 = 121.00
The extra 1.00 comes from the interest
of 10(0.10) = 1.00 earned on the first
interest payment.

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4-10
Future values of $100 at

10%

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4-11
Future values:
Simple interest and compound
interest
Growth of
$100 original
amount at
10%
Pink shaded
area is result
of
compounding

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4-12
Calculating future value

Using a calculator
Calculator key: yx
Using the Future Value Factor Table

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4-13
Future value: Example 2

Suppose you invest the $100 from the
previous example for five years.
How much would you have?
Formula solution:
FV = PV(1+r)t = 100(1.10)5 = 161.05
The effect of compounding is small for a

small number of periods, but it increases
as the number of periods increases.
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4-14
Future value: Example 3

Suppose you had a relative deposit $5
at 6% interest 200 years ago.
How much would this be worth today?
FV = 5(1.06)200 = $575 629.50
What is the effect of compounding?

Simple interest = 5 + 200(5)(0.06)
= 5+60=65
Compounding added $575564.5 to the
value of the investment.
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4-15
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?
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4-16
Present value and

discounting
The current value of future cash flows
discounted at the correct discount rate

Present value = the current value of an
amount to be received in the future.
Why is it worth less than face value?
Opportunity cost
Risk and uncertainty
Discount rate = (time, risk)

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4-17
Present value
continued
FV = PV(1 + r)t
Rearrange to solve for basic present value
equation
PV = FV / (1+r)t
PV = FV(1+r)t
Discounting = finding the present value

of one or more future amounts.
(1+r)t is the present value factor.

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4-18
Present value example 1

Single period
Next year you might need $400 to buy
textbooks.
You can earn 7% on your money.
How much do you have to put up today?
Formula solution:
PV = FV(1+r) t = 400/(1+0.07)
PV = 373.83
Calculator keys:
1 N; 7 I/Y; 400 FV; CPT PV = 373.83
Clear the TVM registers
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4-19
Present value example 2 Multiple

period
You want to buy a new car with $50 000.
The car costs $68 500. If you can earn 9%,
how much needs investing today to buy
the car in two years? Do you have enough?
Assume the price will stay the same.
PV=FV/(1 + r)t
PV = 68 500/(1.09)2 = 57 655.08
Your buying power is short by $7655
Calculator keys:
2 N; 9 I/Y; 68500 FV; CPT PV = 57655.08

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4-20
Present value example 3 Multiple

period
Your parents set up a trust fund for you
10 years ago.
Today it is worth $19 671.51.
If the fund earned 7% per year, how
much did your parents invest?
PV = 19 671.51 / (1.07)10 = $10 000
Calculator keys:
10 N: 7 I/Y: 19671.51 FV: CPT PV = -10000
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4-21
Present value:
Important relationship
1
For a given interest rate:
The longer the time period,
the lower the present value.
FV
PV
t
(1 r)
For a given r, as t
increases, PV
decreases.

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4-22
Present value: Important

relationship 1 continued
What is the present value of $500 to be

received in five years? 10 years? The
discount rate is 10%.
5 years: PV = 500 / (1.1)5 = $310.46
10 years: PV = 500 / (1.1)10 = $192.77
Calculator:
5 years: N = 5; I/Y = 10; FV = 500; CPT PV =
310.46
10 years: N = 10; I/Y = 10; FV = 500;
CPT PV = 192.77
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4-23
Present value:
Important relationship II
For a given time period:
The higher the interest rate, the smaller
the present value.
FV
PV
t
(1 r)
For a given t, as r increases,
PV decreases.
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4-24
Present value: Important

relationship 2 continued
What is the present value of $500
received in five years if the interest rate
is 10%? 15%?
Rate = 10%: PV = 500 / (1.10)5 = $310.46
Rate = 15%: PV = 500 / (1.15)5 = $248.58
Calculator:
10%: N = 5; I/Y = 10; FV = 500; CPT PV = 310.46
15%: N = 5; I/Y = 15; FV = 500; CPT PV = 248.58

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4-25
The basic PV equation

PV = FV / (1 + r)t
There are four parts to this equation:
PV, FV, r and t
If any three are known, then the fourth
can be solved
Be sure to remember the sign

convention
+CF = Cash INFLOW
CF = Cash OUTFLOW
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4-26
Present versus future value:

Evaluating investments
Your company proposes to buy an asset for

$335. Its very safe. Youll sell the asset in
three years for $400. You could invest the
$335 elsewhere at 10% with very little risk.
What do you think of the proposed
investment?
Not a good investment.
FV of 335= 335(1.1)3 = 445.89
Future value of $335 is more than the value
of asset in three years.
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4-27
Discount rate
To find the implied interest rate,
rearrange the basic PV equation and
solve for r:
FV = PV(1 + r)t
r = (FV / PV)1/t 1
If using formulas with a calculator,

make use of both the yx and the 1/X
keys.
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4-28
Discount rate example 1

You are looking at an investment that
will pay $1200 in five years if you
invest $1000 today.
What is the implied rate of interest?
r = (1200 / 1000)1/5 1 = 0.03714 = 3.714%
Calculator the sign convention matters!
N=5
PV = -1000 (you pay $1000 today)
FV = 1200 (you receive $1200 in 5 years)CPT I/Y
= 3.714%
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4-29
Discount rate example

2
You are offered an investment that will
allow you to double your money in six

years. You have $10 000 to invest. What
is the implied rate of interest?
Formula:
r = (20 000 / 10 000)1/6 1
r = 0.122462 = 12.25%
Calculator key strokes

N = 6; FV = 20 000; PV = 10 000; CPT I/Y = 12.25%
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4-30
Finding the number of periods

Start with basic equation and solve
for t:
FV = PV(1 + r)t
FV
ln
PV
t
ln(1 r )
Calculator:
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CPT N
4-31
Number of periods
example 1
You want to buy a new car and youre willing to

pay
$20 000. If you can invest at 10% per year and
you currently have $15 000, how long will it be
before you have enough money to pay cash for
the car?
Formula:
t = ln(20 000 / 15 000) / ln(1.1) = 3.02 years
Calculator:
I/Y = 10; FV = 20 000; PV = 15 000;
CPT N = 3.02 years
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4-32
Number of periods
example 2
Suppose you want to buy a new house. You
currently have $15 000 and you figure you
need to have a 10% deposit plus an
additional 5% in legal fees.
If the type of house you want costs about
$150 000 and you can earn 7.5% per year,
how long will it be before you have enough
money for the deposit and legal fees?

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4-33
Number of periods example 2

continued
How much do you need to have in the

future?
Deposit = 0.1(150 000) = $15 000

Legal fees = 0.05(150 000 15 000)
= $6750
Total needed = 15 000 + 6750 = $21 750
Compute the number of periods:

PV = 15 000; FV = 21 750; I/Y = 7.5;
CPT N = 5.14 years
Using the formula:

t = ln(21 750 / 15 000) / ln(1.075) = 5.14 years
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4-34
Example: Work the web

Click on the web icon to go to the
present value part of
www.moneychimp.com and work the
following example:
You need $40 000 in 15 years. If you can
earn 9.8% interest, how much do you
need to invest today?
You should get $9841.

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4-35
Summary of TVM
calculations

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4-36
Discounted cash flow valuation

Chapter 5
Learning objectives
5.1 Determine the future value and present
value of multiple cash flows
5.2 Calculate loan payments and find the
interest rate on a loan
5.3 Describe how loans are amortised or paid
off
5.4 Explain how interest rates are quoted
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5-37
Future value with multiple cash

flows
Suppose you deposit $100 today in
an account paying 8%. In one year,
you will deposit another $100. How
much will you have in two years?
At the end of first year

100 (1.08) + 100 = 208
At the end of second year
= 208 (1.08) = 224.64

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5-38
Using a time line

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Future value: Multiple cash flows

example
You think you will be able to deposit
$4000 at the end of each of the
next three years in a bank account
paying 8% interest.
You currently have $7000 in the
account.
How much will you have in three years?
How much in 4 years?

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5-40
Future value: Multiple cash flows

Find the value at Year 3 of each cash
flow and add them together
Year 0: FV = $7000(1.08)3 = $ 8 817.98
Year 1: FV = $4000(1.08)2 = $ 4 665.60
Year 2: FV = $4000(1.08)1 = $ 4 320.00
Year 3: value
= $ 4 000.00
Total value in three years = $21 803.58
Value at Year 4
= $21 803.58(1.08) = $23 547.87
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5-41
Present value: Multiple cash flows

example
Youre offered an investment that will pay $200
in Year 1, $400 the next year; $600 the
following year; and $800 in the fourth year. You
can earn 12% on similar investments.
What is the most you should pay for this one?
Find the PV of each cash flow and add them:
Year 1 CF: $200 / (1.12)1 = $ 178.57
Year 2 CF: $400 / (1.12)2 = $ 318.88
Year 3 CF: $600 / (1.12)3 = $ 427.07
Year 4 CF: $800 / (1.12)4 = $ 508.41
Total PV
= $1432.93
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5-42
Present value: Multiple cash flows

Time line
0
4
Time
(years)
20
0
40
0
178.5
= 1/(1.12)2
7
318.8 x
= 1/(1.12)3
8
427.0 x
7
= 1/(1.12)4 x
508.4
1
1,432.9
3
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60
0
80
0
5-43
Quick quiz: Part 1

Suppose you are looking at the following
possible cash flows:
Year 1: CF = $100
Years 2 and 3: CFs = $200
Years 4 and 5: CFs = $300
The required discount rate is 7%.
What is the value of the CFs at Year 5?

What is the value of the CFs today?
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5-44
Quick Quiz: Part 1 Solution: Formula

Using formulas and one CF at a time:
Year 1 CF: FV5 = 100(1.07)4 = 131.08; PV0 = 100 / 1.07
= 93.46; FV3 = 100(1.07)2 = 114.49
Year 2 CF: FV5 = 200(1.07)3 = 245.01; PV0 = 200 / (1.07)2
= 174.69; FV3 = 200(1.07) = 214
Year 3 CF: FV5 = 200(1.07)2 = 228.98; PV0 = 200 / (1.07)3
= 163.26; FV3 = 200
Year 4 CF: FV5 = 300(1.07) = 321; PV0 = 300 / (1.07)4
= 228.87; PV3 = 300 / 1.07 = 280.37
Year 5 CF: FV5 = 300; PV0 = 300 / (1.07)5
= 213.90; PV3 = 300 / (1.07)2 = 262.03
Value at year 5 = 131.08 + 245.01 + 228.98 + 321 + 300
= 1226.07
Present value today = 93.46 + 174.69 + 163.26 + 228.87
+ 213.90 = 874.18
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5-45
Quick quiz: Part 1

Time line

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5-46
Valuing level cash flows : Annuities and

perpetuities
Annuityfinite series of equal
payments that occur at regular
intervals
If the first payment occurs at the end of the
period, it is called an ordinary annuity
If the first payment occurs at the beginning
of the period, it is called an annuity due
Perpetuityinfinite series of equal

payments

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5-47
Annuities and
perpetuities
Basic
formulas
Perpetuity: PV = C/r
Annuities:
1
1 (1 r ) t
PV C
r
(1 r ) t 1
FV C

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5-48
Annuity Example
You can afford
$632 per month.
Going rate is 1% a
month for 48
months.
How much can you
borrow?
You borrow money
TODAY so you
need to compute
the present value.
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48 [N]
1
[I/Y]
632 [+/-][PMT]
0
[FV]
[CPT][PV]= 23,999.54
($24,000)
1
1
(1.01)48
PV 632
.01
23,999.54
=PV(0.01,48,632,0)
5-49
Finding the payment

Suppose you want to borrow $20 000 for a
new car and you can borrow at 8% per year,
compounded monthly (8/12 = 0.66667% per
month).
If you take a four-year loan, what is your
monthly payment?
=PMT(0.006667,48,20
000,0)
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4(12) = 48
[N]
0.66667 [I/Y]
20,000 [PV]
0
[FV]
[CPT][PMT]=
488.26
5-50
Finding the number of payments

example
$1000 is due on a credit card. Payment
= $20 month minimum. Rate = 1.5% per
month
How long would it take to pay off the $1000?
1000 = 20(1 1/1.015t) / 0.015
0.75 = 1 1 / 1.015t
1 / 1.015t = .25
1 / .25 = 1.015t
t = ln(1/0.25)/ln(1.015) = 93.111months = 7.75years
And this is only if you dont charge anything more

on the card!

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5-51
Finding the rate

Suppose you borrow $10 000 from your
parents to buy a car. You agree to pay
$207.58 per month for 60 months.
What is the monthly interest rate?
Calculator keys
60 [N]
10000 [PV]
207.58 [+/][PMT]
0 [FV]
[CPT][I/Y] = 0.75%
Spreadsheet function
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=RATE(60,
207.58,10000,0)
5-52
Quick quiz
You want to receive $5000 per month
for the next five years. How much
would you need to deposit today if
you can earn 0.75% per month?
60 [N]
0.75 [I/Y]
5000 [PMT]
0 [FV]
[CPT][PV]= 240
866.87
CONNECT: UOW
=PV(0.0075,60,500
0,0)
5-53
Quick quiz:
continued
You want to receive $5000 per month

for the next 5 years.
What monthly rate would you need to
earn if you only have $200 000 to
deposit?
60 [N]
200000 [+/]
[PV]
5000 [PMT]
0 [FV]
[CPT][I/Y]=
CONNECT: UOW
1.4395%
=RATE(60,5000,
200000,0)
5-54
Quick quiz:
continued
Suppose you have $200 000 to

deposit and you can earn 0.75% per
month.
How many months could you receive the
0.75
[I/Y]payment?
$5000
200000 [+/][PV]
5000 [PMT]
0 [FV]
[CPT][N]= 47.73
months
/4
years
VISIONARY / PASSIONATE
DYNAMIC
CONNECT: UOW
=NPER(0.0075,5000,200000,0)
5-55
Quick quiz:
continued
Suppose you have $200 000 to

deposit and you can earn 0.75% per
month.
How much could you receive every month
5 years?
60for
[N]
=PMT(0.0075,60,
0.75[I/Y]
200000[+/][PV]
0 [FV]
[CPT][PMT]=
4151.67

CONNECT: UOW
200000,0)
5-56
Future values for

annuities
Suppose you begin saving for your

retirement by depositing $2000 per
year in a superannuation fund. If the
interest rate is 7.5%, how much will
you have in 40 years?
40 [N]
7.5[I/Y]
0 [PV]
2000[+/][PMT]
[CPT][FV]=
VISIONARY454513.04
/ PASSIONATE / DYNAMIC
CONNECT: UOW
=FV(0.075,40,
2000,0) t
(1 r) 1
(1.075)40 1
FV 2000
454, 513.04
.075
FV PMT
5-57
Annuity due
An annuity for which the cash flows
occur at the beginning of the period.
You are saving for a new house and
you put $10 000 per year in an
account paying 8%. The first payment
is made today. How much will you
have at the end of three years?

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5-58
Using the formula and calculator

to solve annuity due
[2nd][BGN][2nd][SET]
3 [N]
8[I/Y]
0 [PV]
10000[+/][PMT]
[CPT][FV]= 35061.12
[2nd][BGN][2nd][SET]
(1 r)t 1
FVAD PMT
(1 r)
r
(1.08)3 1
FVAD 10000
(1.08) 35, 061.12
.08

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=FV(0.08,3,10000,0,1)
Perpetuities example
An annuity in which the cash flows
continue forever.
Perpetuity formula: PV = PMT / r
Current required return:
40 = 1 / r
r = 0.025 or 2.5% per quarter
Dividend for new preferred:

100 = PMT / .025
PMT = 2.50 per quarter
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5-60
Summary of annuity and perpetuity

calculations

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5-61
Example: Work the Web

www.moneychimp.com is one of the
sites that has a financial calculator.
Click on the information icon and work
out the following example using the
website calculator.
You retire with $1 000 000. The growth rate
is 9%.
How much you can withdraw for next 30
years?
Do the calculation with a calculator and
compare the results.
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5-62
Quick quiz: Part 4

You want to have $1 million to use for
retirement in 35 years.
Q1: If you earn 1% per month, how
much do you need to deposit per
month if the first payment is made in
one
420month?
[N]
1 [I/Y]
0 [PV]
1000000 [FV]
[CPT][PMT]=
155.50
CONNECT: UOW
=PMT(0.01,420,0,10
00000)
5-63
Quick quiz: Part 4
continued
Q2: If you can earn 1% per month,

how much do you need to deposit
per month if the first payment is
made today?
[2nd][BGN][2nd]
[SET]
420 [N]
1 [I/Y]
0 [PV]
1000000 [FV]
[CPT][PMT]=
153.96
[2nd][BGN][2nd]
VISIONARY / PASSIONATE
/ DYNAMIC
CONNECT: UOW
[SET]
=PMT(0.01,420,0,10
00000,1)
5-64
Quick quiz: Part 4
continued
You are considering preference share

that pays a quarterly dividend of
$1.50. If your desired return is 3% per
quarter, how much would you be
willing to pay?
$1.50/0.03 = $50

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5-65
Effective annual rate

(EAR)
This is the actual rate paid (or received)
after accounting for compounding that
occurs during the year.
If you want to compare two alternative
investments with different compounding
periods, you need to compute the EAR
and use that for comparison.

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5-66
Annual percentage rate

(APR)
This is the legal annual rate.
By definition APR = period rate multiplied
by the number of periods per year.
To get the period rate, we rearrange the

APR equation:
Period rate = APR/number of periods per
year
You should NEVER divide the effective

rate by the number of periods per year
it will NOT give you the period rate.
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5-67
Computing APRs
What is the APR if the monthly rate
is 0.5%?
0.5(12) = 6%
What is the monthly rate if the APR

is 12%, with monthly compounding?
12 / 12 = 1%
Can you divide the above APR by two

to get the semi-annual rate?
NO!!! You need an APR based on semiannual compounding to find the semiannual rate.
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5-68
EAR formula
m
APR
EAR 1
m
APR = the quoted rate
m = number of compounds per
year

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5-69
Computing EARs
example 1
Suppose you can earn 1% per month
on $1 invested today.
What is the APR?
1(12) = 12%
How much are you effectively earning?

FV = 1(1.01)12 = 1.1268
Rate = (1.1268 1) / 1 = 0.1268 = 12.68%

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5-70
Computing EARs
example 2
Suppose you put it in another account,
where you earn 3% per quarter.
What is the APR?
3(4) = 12%
How much are you effectively earning?

FV = 1(1.03)4 = 1.1255
Rate = (1.1255 1) / 1
= .1255 = 12.55%
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EAR and APR on

calculator
[2nd][ICONV]
[2nd][CLR WORK]
3 fields in worksheet:
NOM (Nominal rate-APR)
EFF (Effective annual rate)
C/Y (Compounding periods/yr)
Enter any 2 values, move to the 3rd and press [CPT]

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5-72
Decisions, decisions 2
Which savings accounts should you

choose:
5.25%, with daily compounding

5.30%, with half-yearly compounding
First account:
EAR = (1 + 0.0525/365)365 1 = 5.39%
[2nd][ICONV]:NOM=5.25; C/Y=365 EFF=5.3899
=EFFECT(0.525,365)
Second account:
EAR = (1 + 0.053/2)2 1 = 5.37%
[2nd][ICONV]: NOM=5.3; C/Y=2 EFF=5.3702
=EFFECT(0.53,2)
So the first account is slightly better

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5-73
Computing APRs from

EARs
If you have an effective rate, how can
you compute the APR? Rearrange the
EAR equation and you get:
APR m (1 EAR)
- 1
m = number of compounding periods per year

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APR example
You want to earn an effective rate of 12%.
Youre looking at an account that
compounds on a monthly basis. What APR
must they pay?
APR 12 (1 .12)1/ 12 1 .113 8655 or 11.39%

[2nd][ICONV]: EFF = 12
C/Y
= 12
NOM[CPT] = 11.3866
=NOMINAL(0.12,12)
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Computing payments with

APRs
You want to buy a new advanced computer

and the store will let you provide monthly
payments. The computer costs $3500. The
loan period is for two years and the interest
rate is 16.9%, with monthly compounding.
What is your monthly payment?
Calculator
2(12) = 24[N]; 16.9/12=1.40833 [I/Y];3500 [PV]
0 [FV]; [CPT][PMT] = 172.88
Spreadsheet = PMT(0.0140833,24,3500,0)

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Future values with monthly

compounding
You want to deposit $50 per month
into an account with APR of 9%, based
on monthly compounding. How much
will you have in the account in 35
years?
Calculator:
420 [N] (35 12) 0.75 [I/Y] (9/12)
0 [PV] 50 [PMT]
[CPT][FV]= 147,089.22
Spreadsheet: = FV(0.0075,420,-50,0)
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Present value with daily

compounding
You need $15 000 in three years for a

new car. If you can deposit money into an
account with an APR of 5.5% (daily
compounding), how much would your
deposit be?
Calculator:
1095 [N] (3 365) 0.015068493[I/Y] (5.5/365
0 [PMT] 15 000 [FV]
[CPT][FV] = -12 718.56
Spreadsheet: PV(0.00015,1095,0,15000)

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Quick quiz: Part 5

What is the definition of an APR?
What is the effective annual rate?
Which rate should you use to compare
alternative investments or loans?
Which rate do you need to use for the
time value of money calculations?

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Loan types and loan

amortisation: Pure discount
loans example
Bank bills are excellent examples of pure

discount loans. The principal amount is
repaid at some future date. No periodic
interest payments are paid.
A 90-day Bank Bill will repay $10 000 in 90
days and the market interest rate is 7%,
how much will the bill sell for in the
market?
Formula
PV = 10 000 /( 1+0.07X90/365)
= $9830.33.
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Interest only loan

example
Consider a five-year, interest only loan

with a 7% interest rate. The principal
amount is $10 000. Interest is paid
annually.
What would the stream of cash flows be?
Years 14: Interest payments of 0.07(10 000)
= $700
Year 5: Interest + principal = $10 700
This cash flow stream is similar to the cash

flows on corporate bonds; we will talk
about them in greater detail later.
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Amortised loan with fixed

payment example
Each payment covers the interest
expense plus reduces principal.
Consider a 5-year loan with annual
payments. The interest rate is 9%
and the principal amount is $5000.
What is the annual payment?
5000 = PMT[1 1 / 1.095]/0.09 PMT = 1285.46
= PMT(0.09,5,5000,0) = 1285.46
5 [N]; 9 [I/Y]; 5000 [PV], 0 [FV], [CPT][PMT] =
1285.46
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Amortised loan with fixed

payment Example: Amortisation
table
Spreadsheet strategies.

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Example: Work the web

Several websites have calculators that
will prepare amortisation tables quickly.
One such website is:
www.mortgagecalculatorplus.com
Try the following example:

The amount of the loan is $250 000. Youll
repay the loan over the next 30 years at
6.5%. What are your monthly payments?
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FIN921

Time value of money

The current value of future cash flows

The amount an investment is worth after one

Interest rate (r)

Future values: general

Future value interest factor = (1 + r)t

VISIONARY / PASSIONATE / DYNAMIC

Timeline of cash flows

+CF = Cash INFLOW CF = Cash OUTFLOW

Timeline for a $100 lump

Future values: Example

Investing for a single period

Future values: Example

Future values: Effects of

VISIONARY / PASSIONATE / DYNAMIC

Future values of $100 at

VISIONARY / PASSIONATE / DYNAMIC

VISIONARY / PASSIONATE / DYNAMIC

Calculating future value

Using the Future Value Factor Table

VISIONARY / PASSIONATE / DYNAMIC

Future value: Example 2

The effect of compounding is small for a

Future value: Example 3

What is the effect of compounding?

Quick quiz: Part 1

Present value and

discounted at the correct discount rate

VISIONARY / PASSIONATE / DYNAMIC

Discounting = finding the present value

VISIONARY / PASSIONATE / DYNAMIC

Present value example 1

Present value example 2 Multiple

VISIONARY / PASSIONATE / DYNAMIC

Present value example 3 Multiple

VISIONARY / PASSIONATE / DYNAMIC

Present value: Important

What is the present value of $500 to be

Present value: Important

VISIONARY / PASSIONATE / DYNAMIC

The basic PV equation

Be sure to remember the sign

Present versus future value:

Your company proposes to buy an asset for

If using formulas with a calculator,

Discount rate example 1

Discount rate example

allow you to double your money in six

Calculator key strokes

Finding the number of periods

You want to buy a new car and youre willing to

VISIONARY / PASSIONATE / DYNAMIC

Number of periods example 2

How much do you need to have in the

Deposit = 0.1(150 000) = $15 000

Compute the number of periods:

Using the formula:

Example: Work the web

VISIONARY / PASSIONATE / DYNAMIC

VISIONARY / PASSIONATE / DYNAMIC

Discounted cash flow valuation

Future value with multiple cash