Scribd Logo
Upload

Welcome to Scribd!

  • 32 views

    Time Value of Money

    Uploaded by

    Aulia Endini
    The document discusses the time value of money concepts of compounding, future values, discounting, and present values. It provides examples of how these concepts are used to calculate future sums from investments, evaluate capital projects, determine interest rates on loans and bond values. Compounding means interest earns interest, so money grows exponentially over time. Present value calculations discount future cash flows to determine their worth today. Annuities involve regular payments over periods and their future and present values can be calculated using time value of money formulas.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Time Value of Money

    Uploaded by

    Aulia Endini
    32 views13 pages
    The document discusses the time value of money concepts of compounding, future values, discounting, and present values. It provides examples of how these concepts are used to calculate future sums from investments, evaluate capital projects, determine interest rates on loans and bond values. Compounding means interest earns interest, so money grows exponentially over time. Present value calculations discount future cash flows to determine their worth today. Annuities involve regular payments over periods and their future and present values can be calculated using time value of money formulas.

    Original Title

    Time Value of Money (3)

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses the time value of money concepts of compounding, future values, discounting, and present values. It provides examples of how these concepts are used to calculate future sums from investments, evaluate capital projects, determine interest rates on loans and bond values. Compounding means interest earns interest, so money grows exponentially over time. Present value calculations discount future cash flows to determine their worth today. Annuities involve regular payments over periods and their future and present values can be calculated using time value of money formulas.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    32 views13 pages

    Time Value of Money

    Uploaded by

    Aulia Endini
    The document discusses the time value of money concepts of compounding, future values, discounting, and present values. It provides examples of how these concepts are used to calculate future sums from investments, evaluate capital projects, determine interest rates on loans and bond values. Compounding means interest earns interest, so money grows exponentially over time. Present value calculations discount future cash flows to determine their worth today. Annuities involve regular payments over periods and their future and present values can be calculated using time value of money formulas.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    TIME VALUE OF

    MONEY
    MEETING 4
    TIME VALUE OF MONEY

    • Time value of money is a critical consideration in financial and investment decisions. For
    example,
    - compound interest calculations are needed to determine future sums of money resulting
    from an investment.
    - Discounting, or the calculation of present value, which is inversely related to
    compounding, is used to evaluate future cash flow associated with capital budgeting
    projects
    TIME VALUE OF MONEY
    FUTURE VALUES-
    COMPOUNDING

    • A dollar in hand today is worth more than a dollar to be received tomorrow because of the
    interest it could earn from putting it in a savings account or placing it in an investment
    account. Compounding interest means that interest earns interest.
    TIME VALUE OF MONEY
    FUTURE VALUES-
    COMPOUNDING
    Intrayear Compounding
    • Interest is often compounded more frequently than once a year. Banks, for example,
    compound interest quarterly, daily, and even continuously. If interest is compounded m
    times a year
    in the case of semiannual compounding (m = 2),
    TIME VALUE OF MONEY
    Future Value of an Annuity

    • An annuity is defined as a series of payments (or receipts) of a fixed amount for a


    specified number of periods. Each payment is assumed to occur at the end of the period.
    The future value of an annuity is a compound annuity which involves depositing or
    investing an equal sum of money at the end of each year for a certain number of years
    and allowing it to grow.
    TIME VALUE OF MONEY
    Future Value of an Annuity

    Sn = the future value of an n-year annuity


    A = the amount of an annuity
    TIME VALUE OF MONEY
    PRESENTVALUE-
    DISCOUNTING

    • Present value is the present worth of future sums of money. The process of calculating
    present values, or discounting, is actually the opposite of finding the compounded
    future value. In connection with present value calculations, the interest rate is called the
    discount rate.
    TIME VALUE OF MONEY
    Present Value of an Annuity

    • Interest received from bonds, pension funds, and insurance obligations all involve
    annuities. To compare these financial instruments, we need to know the present value of
    each.
    TIME VALUE OF MONEY
    Perpetuities
    Perpetuities
     Some annuities go on forever. Such annuities are called perpetuities. An example of a
    perpetuity is preferred stock which yields a constant dollar dividend indefinitely.
    Future and present values have numerous applications
    in financial and investment decisions
    TIME VALUE OF MONEY

    • Deposits to Accumulate a Future Sum (or Sinking Fund)  An individual might wish
    to find the annual deposit (or payment) that is necessary to accumulate a future sum. To
    find this future amount (or sinking fund) we can use the formula for finding the future
    value of an annuity.
    TIME VALUE OF MONEY

    • Amortized Loans If a loan is to be repaid in equal periodic amounts, it is said to be an


    amortized loan. Examples include auto loans, mortgage loans, and most commercial
    loans. The periodic payment can easily be computed as follows
    TIME VALUE OF MONEY

    • Bond Values Bonds call for the payment of a specific amount of interest for a stated number of years
    and the repayment of the face value at the bond’s maturity. Thus, a bond represents an annuity plus a
    lump sum. Its value is found as the present value of this payment stream. The interest is usually paid
    semiannually

    I = interest payment per period


    M = par value, or maturity value, usually $1,000
    r = investor’s required rate of return
    n = number of periods.

    You might also like