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Finanças

Finanças. Sept 21. Topics covered. Time value of money Future value Simple interest Compound interest Present value Net present value. Time Value of Money. People always prefer to receive $1 today than $1 in the future

brent-castillo
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Finanças

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  1. Finanças Sept 21

  2. Topics covered • Time value of money • Future value • Simple interest • Compound interest • Present value • Net present value

  3. Time Value of Money • People always prefer to receive $1 today than $1 in the future • The relationship between $1 today and (possibly uncertain) $1 in the future shows the time value of money

  4. Future Values Future Value Compound Interest Simple Interest

  5. Future Values Example - Simple Interest Interest earned at a rate of 6% for five years on a principal balance of $100.

  6. Future Values Example - Simple Interest Interest earned at a rate of 6% for five years on a principal balance of $100. Today Future Years 12345 Interest Earned Value 100

  7. Future Values Example - Compound Interest Interest earned at a rate of 6% for five years on the previous year’s balance. Interest Earned Per Year =

  8. Future Values Example - Compound Interest Interest earned at a rate of 6% for five years on the previous year’s balance. Today Future Years 12345 Interest Earned Value 100

  9. Future Values Future Value of C = FV

  10. Future Values Example - FV What is the future value of $100 if interest is compounded annually at a rate of 6% for five years?

  11. Future Values with Compounding Interest Rates

  12. Manhattan Island Sale Peter Minuit bought Manhattan Island for $24 in 1626. Was this a good deal? To answer, determine $24 is worth in the year 2006, compounded at 8%.

  13. Present Values • Present Value: • PV Factor: • Discount Rate:

  14. Present Values

  15. Present Values Example You just bought a new computer for $3,000. The payment terms are 2 years same as cash. If you can earn 8% on your money, how much money should you set aside today in order to make the payment when due in two years?

  16. Present Values PV Factor = PV of $1 • Discount Factors can be used to compute the present value of any cash flow.

  17. Present Values with Compounding Interest Rates

  18. Net Present Value NPV = - cost + PV • Example: A project costs $50,000. The project will generate profits of $25,000 one year from now, $20,000 two years from now, and $15,000 three years from now. The discount rate is 7% for this project. What is the NPV of the project?

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