The Big Cheese Of Mousetraps

3631 words, 15 pages

Intro Sample...


1)2 ' 100(1.21) ' $121

© morevalue.com, 1997
Alex Tajirian

Time Value of Money

6-5

In general for a single CF, FVn ' CF (1% i)n ' CF [FVIFi, n] where, i
/

(2)

re-investment rate, return on investment, cost of borrowing, opportunity cost, compounding rate, interest rate

n (1+i)n

/ number of periods in the future / FVIFi, n / FV of interest Factor / compounding factor

#

How to calculate FVIF? ! ! Use calculator use table For i ' 10%, n ' 2, Y FVIF10, 2 ' 1.2100

3

Is (1+i)n >, = , or < 1 ?

© morevalue.com, 1997
Alex Tajirian

Time Value of Money

6-6

FV of $1

i > 10% i = 10% $1 i=0%

# of periods

Notes: (a) If interest rate "i" = 0, then FV of a CF is constant irrespective of how far in the future you would be receiving it. sThe horizontal line above represents this. Given "i", the greater the "n", # of periods in the future, the greater the FV. Thus, FV and "n" are positively related. Given "n", the higher the "i" the higher the FV. Thus, FV and "i" are positively related. i.e., they move in the same direction.
© morevalue.com, 1997
Alex Tajirian

(b)

(c)

Time Value of Money

6-7

4. PRESENT VALUE (PV)

L

You are promised $100 one year from today What is value of $100 today?; PV=? ! ! It better be < 100; time value of money from (2) FV1 = CF0 (1 + i) Y CF0 ' FV1 (1 % i) (3)

but CF0 = PV (value today) and FV1 = CF1 in future substitute in (3),

Y PV '

CF1 1% i

'

100 100 ' < 100 1% .1 1.1

' 1& period discounted CF where, i = discount rate

© morevalue.com, 1997
Alex Tajirian

Time Value of Money

6-8

L

You are promised $100 two years from today. PV = ? FV2 ' CF0(1% i)2 ' PV(1% i)2 Y PV ' FV2 (1% i)2 ' CF2 (1% i)2 ' 100 (1.1)2 < 100 < 100 1.1

L

In general for a single CF, PV ' CFn (1 % i) n ' CF n 1 (1 % i)n ' CF n [ PVIFi,n ]

where, i PVIFi, n
/ discount rate / PV of Interest Factor which depends on i, n.
/

discount factor

?

Is PVIF >, View More »

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