Copyright © 2007 Prentice-Hall. All rights reserved THE TIME VALUE OF MONEY • PRESNET VALUE • FUTURE VALUE
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Copyright © 2007 Prentice-Hall. All rights reserved
THE TIME VALUE OF MONEYTHE TIME VALUE OF MONEY
• PRESNET VALUE
• FUTURE VALUE
Copyright © 2007 Prentice-Hall. All rights reserved 2
Time Value of MoneyTime Value of MoneyTime Value of MoneyTime Value of Money
• Interest – cost of using money
• Borrower – interest expense
• Lender – interest revenue
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Present ValuePresent ValuePresent ValuePresent Value
1 2 3 4 5 6
$100,000????
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Present ValuePresent ValuePresent ValuePresent Value
Depends on three factors:
1. Dollar amounts to be paid in the future
2. Length of time between investment and future payment
3. Interest rate
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Future ValueFuture ValueFuture ValueFuture Value
1 yr
?????$1,000
10%
Interest = $1,000 x .10 = $100Principal = 1,000Future value $1,100
OrFuture value = 1,000 x 1.10 = $1,100
PresentValue
FutureValue
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Present ValuePresent ValuePresent ValuePresent Value
1 yr
????? $1,100
10%
Present value x 1.10 = $1,100Present value = $1,100/1.10Present value = $1,000
PresentValue
FutureValue
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Present ValuePresent ValuePresent ValuePresent Value
1 yr
????? $1,100
10%
Present value x 1.10 = $1,100Present value = $1,100/1.10Present value = $1,000
PresentValue
FutureValue
2 yrs
Present value x 1.10 = $1,000Present value = $1,000/1.10Present value = $909
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Present Value of $1 TablePresent Value of $1 TablePresent Value of $1 TablePresent Value of $1 Table
1 yr
????? $1,100
10%PresentValue
FutureValue
2 yrs
Present Value = Future Value x Table Factor = $1,100 x 0.826 = $909
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Present Value of an AnnuityPresent Value of an AnnuityPresent Value of an AnnuityPresent Value of an Annuity
1 yr
????? $1,100
10%PresentValue
FutureValue
2 yrs
Present Value of $1,100 in one year:$1,100 x 0.909 = $1,000
$1,100
Present Value of $1,100 in two years:$1,100 x 0.826 = $909
$1,000 + $909 = $1,909
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Present Value of an Annuity TablePresent Value of an Annuity TablePresent Value of an Annuity TablePresent Value of an Annuity Table
1 yr
????? $1,100
10%PresentValue
FutureValue
2 yrs
$1,100
Present Value of an Annuity = Payments x Table Factor = $1,100 x 1.736 = $1,909.60
Copyright © 2007 Prentice-Hall. All rights reserved
WHAT DO YOU CALCULATE?WHAT DO YOU CALCULATE?
• PRESENT VALUE: $1
• AN ANNUITY
• FUTURE VALUE: $1
• AN ANNUITY
• ANNUITY: SAME AMOUNT FOR EACH PERIOD.
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