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Finance Week 1

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adrix.andriambelo
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P R E S E N T A T I O N

SPRING 2024
INTRODUCTION TO FINANCE
BMI1
Chapter 2

Time Value of Money

Block, Hirt, and Danielsen


Foundations of Financial Management
18th edition

© 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill.
Recall that
compounding or
Explain the time value discounting may
Recognize that the
of money and how a take place on a
present value is based
dollar received today is less-than-annual
on the current value of
worth more than a dollar funds to be received basis such as
received in the future. semiannually or
monthly.

Recognize that the


future value is
based on the
number of periods Calculate yield on
over which the investment (rate of
funds are to be return), annuity due, and
compounded at a payments required.
given interest rate.

OUTLINE
Learning Objective 1

Explain the Time Value of


Money.
For the next 30 days

Option A Option B

Earn $10.000 every day Earn $0.01 on day 1 and double the
balance everyday

Time Value of Money


The concept of Time Value of money

Time Value of Money


The concept of Time Value of money

• If you are offred the choice between having $100 today and having $100
one year from now. What will you prefer? Why?

Time Value of Money


If the annual interest rate i=8%

i=8%
Today after 1 year

$100 ?

$100 received today is worth more


than $100 received after one year
The value of one unit currency vary
over time

Time Value of Money


The time line representation
The time line is a Diagram used to help visulize what is hapening in a
particular problem and then to help set up the problem for solution

0 1 2 3

CF0 CF1 CF2 CF3


• A graphical representation used to show the timing of cash flows (CF).
• Tick marks occur at the end of periods,
• so Time 0 is today;
• Time 1 is the end of the first period (year, month, etc.) or the beginning of the
second period.
2-6
Time Value of Money
Drawing Time Lines: Different Possibilities
$100 lump sum due in 2 years
0 1 2
i%
100

3 year $100 (ordinary annuity)


0 1 2 3
i%
100 100 100
Uneven cash flow stream (Mixed stream) : A series of unequal
cash flows reflecting no particular pattern.
0 1 2 3
i%
40K 5K 11K 35K
Time Value of Money
Relationship to the Capital Outlay Decision
• Time value of money used to determine whether future benefits
sufficiently large to justify current outlays

• Mathematical tools of time value of money used in making capital


allocation decisions

Time Value of Money


9-12
Learning Objective 2

Explain the Future Value


Future Value—Single Amount

• Measuring value of amount allowed to grow at given interest rate over a period
of time
• An investor has $1,000 and needs to calculate its worth after four years at 10
percent interest per year

1st year:

2nd year:

3rd year:

4th year:

Time Value of Money


9-14
Future Value—Single Amount Continued

A generalized formula for Future Value:


𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛
where:
𝐹𝑉 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢𝑒
𝑃𝑉 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒
𝑖 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
𝑛 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠

In the previous case, PV = $1,000, i = 10 percent, n = 4, hence:


………………………………………………

Time Value of Money


9-15
Learning Objective 3

Explain the Present Value


Present Value—Single Amount

• A sum payable in the future is worth less today than the stated amount
• The formula for the present value is derived from the original formula for future
value:
FV = PV(1 + i)n
𝑃𝑉 = ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯
• Present value can be determined by solving for the formula above, restating the
formula as:
………………………………….
• Assuming n = 4 and i = 10%; FV= $1,464
𝑃𝑉 = ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯

Time Value of Money


9-17
Figure 9-1 Relationship of Present Value to Future Value

0 i% 1 2 …… n

PV FV
Compounding

Discounting

Time Value of Money


Solve it 9.1
• You invest $3,000 for three years at 12 percent

a. What is the value of your investment after one year?.


b. What is the value of your investment after two years?
c. What is the value of your investment after three years?.
d. Combine these three steps by using the formula
1st year

2nd year

3rd year

3rd year
Time Value of Money
Solve it 9.2
What is the present value of 7,900 in 10 years at 11 percent?;16,600 in 5 years at
9%;26,000 in 14 years at 6%

? i=11% $7,900

0……….………..………. ............. ……… 10

? i=9% $16,600

0……………………..5

? i=6% $26,000

0………………………………………………………………14
Time Value of Money
Solve it 9.3

a. What is the present value of $140,000 to be received after 30 years with a 14 percent
discount rate?
b. Would the present value of the funds in part a be enough to buy a $2,900 concert ticket?

CORRECTION

a.

b.
Time Value of Money
Solve it 9.4

You will receive $6,800 three years from now. The discount rate is 10 percent. What is the
present value?

CORRECTION

Time Value of Money


Solve it 9.6

Your aunt offers you a choice of $21,600 in 30 years or $200 today. If money is discounted
at 17 percent, which should you choose?

CORRECTION

Time Value of Money


Learning Objective 4

Calculate yield on investment


(rate of return), annuity due, and
payments required
Interest Rate—Single Amount

• Measures the return on investment


• Determine unknown variable, i, given the following variables

FV/PV: Future/Present value of money


n: number of years
!
𝐹𝑉 "
𝑖= −1
𝑃𝑉

Time Value of Money


9-25
Do it 9.32

• Franklin Templeton has just invested $9,260 for his son (age one). This money will be used for his
son’s education 18 years from now. He calculates that he will need $71,231 by the time the boy goes to
school. What rate of return will Mr. Templeton need in order to achieve this goal?

• Correction

Time Value of Money


Number of Periods—Single Amount

• Determine how many years it would take an investment to grow to a certain dollar
amount
• Find the number of periods, n, given the following

FV/PV: Future/Present value of money


i: interest rate

!"
!"
#"
𝑛 =
!"($%&)
Application:
Assume that an investment can earn 10% per year. How many years would it
take for $1000 to grow to be $1,464.1

Time Value of Money


9-27

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