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    Introduction To Finance: Course Code: FIN201 Lecturer: Tahmina Ahmed Section: 7 Email: Tahmina98ahmedsbe@iub - Edu.bd

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    Tarif Islam
    The document provides an introduction to the concept of the time value of money. It explains that money received today is worth more than money received in the future because it can be invested and earn interest. It then provides examples of calculating present and future value using formulas. Finally, it includes practice problems applying the concepts of present value, future value, and calculating values for annuities.

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    Introduction To Finance: Course Code: FIN201 Lecturer: Tahmina Ahmed Section: 7 Email: Tahmina98ahmedsbe@iub - Edu.bd

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    Tarif Islam
    131 views14 pages
    The document provides an introduction to the concept of the time value of money. It explains that money received today is worth more than money received in the future because it can be invested and earn interest. It then provides examples of calculating present and future value using formulas. Finally, it includes practice problems applying the concepts of present value, future value, and calculating values for annuities.

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    The document provides an introduction to the concept of the time value of money. It explains that money received today is worth more than money received in the future because it can be invested and earn interest. It then provides examples of calculating present and future value using formulas. Finally, it includes practice problems applying the concepts of present value, future value, and calculating values for annuities.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    131 views14 pages

    Introduction To Finance: Course Code: FIN201 Lecturer: Tahmina Ahmed Section: 7 Email: Tahmina98ahmedsbe@iub - Edu.bd

    Uploaded by

    Tarif Islam
    The document provides an introduction to the concept of the time value of money. It explains that money received today is worth more than money received in the future because it can be invested and earn interest. It then provides examples of calculating present and future value using formulas. Finally, it includes practice problems applying the concepts of present value, future value, and calculating values for annuities.

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    of 14

    Introduction to Finance

    Course Code: FIN201


    Lecturer: Tahmina Ahmed
    Section: 7
    Chapter: 9
    Email: [email protected]
    The Time Value of Money
    Money has a time value associated with it, and therefore a dollar received today is worth more than a
    dollar received in the future. This is the concept of the time value of money.
    In simple words, cash that you receive today is more valuable than the cash received at a later date. The
    reason is that someone who agrees to receive payment at a later date sacrifices the ability to invest that
    cash right now.
    Time value money is basically the future value of the current money.
    If Abdullah owns $10,000 now and invests it at an interest rate of 10%, then he will have earned $1,000
    by having use of the money for one year. If he were instead not to have access to that cash for one year,
    then he would lose the $1,000 of interest income. The interest income in this example represents the time
    value of money. To extend the example, what is the current pay out of cash at which Abdullah would be
    indifferent to receiving cash now or in one year? In essence, what is the amount that, when invested at
    10%, will equal $10,000 in one year? The general formula used to answer this question, known as the
    present value of 1 due in N periods, is:
    1 1
    ------------------------------------------- = ---------------------- = $9,090.91
    (1 + Interest rate) Number of years (1 + 10%) 1 year
    Present Value: Formula
    The present value formula consists of the present value and future value related to compound interest.
    The present value (PV) is the initial amount (the amount invested, the amount lent, the amount
    borrowed, etc). The future value (FV) is the final amount. i.e., FV = PV + interest.

    PV = present value
    FV = future value
    r = rate of return/interest
    {n} = number of periods/years

    Discounted rate is the interest that is used to determine the present value of the future cash.
    Problem Solving: Present Value

    7. Your uncle offers you a choice of $105,000 in 10 years or $47,000 today. If money
    is discounted at 9 percent, which should you choose?

    Take the $47,000 today instead of $105,000 in 10 years.


    Problem Solving: Present Value

    7. Your uncle offers you a choice of $105,000 in 10 years or $47,000 today. If money
    is discounted at 9 percent, which should you choose?

    As you can see the $105,000 is actually worth $44,353.13 today, therefore taking
    the $47,000 today will be a wise option.
    Problem Solving: Future Value

    12. You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5
    years you take the proceeds and invest them for 12 years at 15 percent. How
    much will you have after 17 years?
    After 5 years After 17 years

    FV = PV × (1+i) n
    FV = $16,105.10 × (1.15)12
    FV = $86,166.31
    Present and Future Value – Annuity
    The present value of an annuity (series of payments) is the cash value of all future payments
    given at a set discount rate.
    Annuity is defined as a series of consecutive payments or receipts of equal amount received
    usually at the end of the year (period).
    To find the present value of an annuity, we reverse the process. In theory, each individual
    payment is discounted back to the present and then all of the discounted payments are added up,
    yielding the present value of the annuity.
    Problem Solving: Present Value

    15. Sherwin Williams will receive $18,500 a year for the next 25 years as a result
    of a picture he has painted. If a discount rate of 12 percent is applied, should he
    be willing to sell out his future rights now for $165,000?

    Sherwin Williams should take the $165,000 for his future


    rights now.
    Problem Solving: Present Value

    16. Carrie Tune will receive $19,500 for the next 20 years as a payment for a new
    song she has written. If a 10 percent rate is applied, should she be willing to sell
    out her future rights now for $160,000?

    Carrie Tune should not accept $160,000 for the future


    rights because they are worth more than that.
    Problem Solving: Future Value

    19. Al Rosen invests $25,000 in a mint condition 1952 Mickey Mantle Topps
    baseball card. He expects the card to increase in value 12 percent per year for
    the next 10 years. How much will his card be worth after 10 years?
    Problem Solving: Present Value
    23. Jack Hammer invests in a stock that will pay dividends of $2.00 at the end of the
    first year; $2.20 at the end of the second year; and $2.40 at the end of the third
    year. Also, he believes that at the end of the third year he will be able to sell the
    stock for $33. What is the present value of all future benefits if a discount
    rate of 11 percent is applied? (Round all values to two places to the right of the
    decimal point.)

    First Dividend Second Dividend Third Dividend


    Problem Solving: Present Value

    Selling Price Present Value Total

    $24.13 Selling price


    + 1.80 First dividend
    + 1.79 Second dividend
    + 1.75 Third dividend
    $29.47 Present total value
    Problem Solving: Present Value

    26. Determine the amount of money in a savings account at the end of 10 years,
    given an initial deposit of $5,500 and a 12 percent annual interest rate when
    interest is compounded (a) annually, (b) semi annually, and (c) quarterly.

    (a) (b) (c)


    Thank You!!!
    Course Code: FIN201
    Lecturer: Tahmina Ahmed
    Section: 7
    Chapter: 9
    Email: [email protected]

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