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Construction Accounting and Financial Management

Construction Accounting and Financial Management. Chapter 15 Time Value of Money. Equivalence. Cash flows have the same perceived value Cash flows are not equal unless they occur at the same period of time For example, $100 today may be equivalent to $105 a year from now

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Construction Accounting and Financial Management

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  1. Construction Accounting and Financial Management Chapter 15Time Value of Money

  2. Equivalence • Cash flows have the same perceived value • Cash flows are not equal unless they occur at the same period of time • For example, $100 today may be equivalent to $105 a year from now • Basis of banking equations in Chapter 16

  3. Equivalence Based Upon Size of the cash flows Timing of the cash flows Interest rate

  4. Variables P = Present value Value at beginning of period 1 (end of period 0) F = Future value Value at end of period n A = Uniform series Cash flows are the same for the end of periods 1 through n Occurs each and every period

  5. Variables i = Periodic interest rate Interest rate for one period Period may be month or year n = Number of interest compounding periods Must be the same length

  6. Single-Payment Compound-Amount Factor Converts a present value into a future value F = P(1 + i)n What will be the value of P dollars in n years at an annual interest rate of i?

  7. Single-Payment Present-Worth Factor Converts a future value into a present value P = F/(1 + i)n How much (P) must I set aside today to have F dollars in n years at an annual interest rate of i?

  8. Uniform-Series Compound-Amount Factor Converts a uniform series into a future value F = A[(1 + i)n – 1]/i If I set aside A dollars every year for n years, how much will I have at the end of n years at an annual interest rate of i? Saving for retirement

  9. Uniform-Series Sinking-Fund Factor Converts a future value into a uniform series A = Fi/[(1 + i)n – 1] How much (A) must I set aside each year for n years to have F dollars at the end of n years at an annual interest rate of i? Saving for retirement

  10. Uniform-Series Present-Worth Factor Converts a uniform series into a present value P = A[(1 + i)n – 1]/[i(1 + i)n] How much can I pay for a home if I can afford a monthly payment of A dollars for n months at a monthly interest rate of i?

  11. Uniform-series capital-recovery factor Converts a present value in to a uniform series A = P[i(1 + i)n]/[(1 + i)n – 1] How much would my monthly payment be on a P dollar loan with a term of n months at a monthly interest rate of i?

  12. Cash-flow diagrams Shows direction, size, and timing of cash flow

  13. Complex cash flows Cash flows occurring at the same period of time may be added or subtracted Use time value of money to moved all of the cash flows to the same point in time and add or subtract them

  14. Finding Unknown Periodic Interest Rates Solving by trial-and-error Set up equations in Excel and use the Goal Seek function to find the solution Cash flows that change directions more than once may have multiple solutions

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