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Chapter 9 Intro To Finance

The document discusses key concepts related to time value of money including compounding, discounting, and annuities. It provides examples and formulas to calculate future and present values of investments under different interest rate scenarios. Key points covered include that the timing of cash flows impacts their value, compounding allows money to grow exponentially over time, and discounting determines the present value of future cash flows. Ordinary and due annuities are also defined.

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24 views15 pages

Chapter 9 Intro To Finance

The document discusses key concepts related to time value of money including compounding, discounting, and annuities. It provides examples and formulas to calculate future and present values of investments under different interest rate scenarios. Key points covered include that the timing of cash flows impacts their value, compounding allows money to grow exponentially over time, and discounting determines the present value of future cash flows. Ordinary and due annuities are also defined.

Uploaded by

biserapatce2
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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CHAPTER 9

Slavica 071218658
Briefly describe the meaning of time value of
money

The financial concept that maintains that the timing of a receipt or payment of a cash flow will affect its value is
called the time value of money (TVM). The time value of money illustrates that, due to its capacity to earn
interest, a cash flow received today is worth more than an identical cash flow to be received on a future date.
The exact current value of a future cash flow is a function of the magnitude of the future cash flow, the return
required by the owner (recipient) of the cash flow, and when in the future the cash flow will occur.
Describe the process of compounding
and its meaning

Compounding is determining a future value of invested present value,


ability of a sum of money to grow exponentially over time by the repeated addition
of earnings to the principal invested.
What is discounting? Why is it important?

Discounting is the process of determining the present value of a payment or a stream of payments that is
to be received in the future
Discounting is the primary factor used in pricing a stream of tomorrow's cash flows.
What is an ordinary annuity? What is
an annuity due?

An ordinary annuity are payments made at the end of each period.


An annuity due are payments made at the beginning of each period.

Example of an ordinary annuity =Consistent quarterly stock dividends


Example of an annuity due=Monthly rent
1.Find the future value one year from now of a $7,000 investment at a 3 percent
annual compound interest rate. Also, calculate the future value if the investment is
made for two years.

● formula
Find the future value of $10,000 invested now, after five years if the annual
interest rate is 8%
a) What would be the future value if the interest rate is a simple interest rate?
b) What would be the future value if the interest rate is a compound interest rate?

● formula
3.Determine the future values if $5,000 is invested in each of the following
situations:
a. 5 percent for ten years
b. 7 percent for seven years
c. 9 percent for four years

Determine the future value at the end of two years of an investment of $3,000
made now and an additional $3,000 made one year from now if the compound
annual interest rate is 4 percent
You are planning to invest $2500 for three years at a nominal interest rate of 9% with
annual compounding
a) What would be the future value of your investment?
b) Assume that expected inflation is 3% per year over the same three-year period. What
would be the investment’s future value?
c) What would be the investment’s future value in terms of purchasing power if inflation
occurs at 9% annual rate?
Find the present value of $7000 to be received a year from today. Assuming a 3% annual discount rate. Also calculate the
present value if the $7000 is received after two years.

Determine the present value now of an investment of $3,000 made one year from now and an additional $3,000 made two
years from now if the annual discount rate is 4 percent.

● formula
Determine the present values if $5,000 is received in the future (i.e., at the end of each indicated time period) in each of the
following situations:
a. 5 percent for ten years
b. 7 percent for seven years
c. 9 percent for four years
Assume you are planning to invest $5000 each year for six years and will earn 10% per
year. Determine the future value of this annuity if your first $5000 is invested at the
end of the first year
r=i
P=annuity ordinary=end
due=beginning
11. What is the present value of a loan that calls for the payment of $500 per year for
six years if the discount rate is 10 percent and the first payment will be made one year
from now? How would your answer change if the $500 per year occurred for ten
years?

12.Determine the PV of a business loan that has 12% interest rate and an annual
payment of $5000 amortized over a five-year period, however the first payment starts
now
12. Determine the annual payment on a $500,000, 12 percent business loan from
a commercial bank that is to be amortized over a five year period. PV=loan

● Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate


Thanks!
Do you have any questions?
Slavica 071218658
Davinci.education

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