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BFIN300 - Chapter 5 - Time Value of Money

This chapter discusses the time value of money concepts including future value, present value, future value and present value of annuities, perpetuities, and uneven cash flows. It shows how to calculate these values using timelines and formulas. It also covers adjusting calculations for semiannual or other compounding periods rather than annual compounding.

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Mhmd
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Download as PPTX, PDF, TXT or read online on Scribd
59 views

BFIN300 - Chapter 5 - Time Value of Money

This chapter discusses the time value of money concepts including future value, present value, future value and present value of annuities, perpetuities, and uneven cash flows. It shows how to calculate these values using timelines and formulas. It also covers adjusting calculations for semiannual or other compounding periods rather than annual compounding.

Uploaded by

Mhmd
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 15

CHAPTER 5

Time Value of Money


 Time lines
 Future value
 Present value
 Future value of annuities
 Present value of annuities
 Perpetuity
 Future Value of uneven cash flow
 Present Value of uneven cash flow
 Semiannual compounding periods
6-1
Time lines
0 1 2 3
i%

CF0 CF1 CF2 CF3

 Show the timing of cash flows.


 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.
6-2
What is the Future value (FV) of an
initial $100 after 3 years, if I/YR = 10%?
 Finding the FV of a cash flow when compound
interest is applied is called compounding.
0 1 2 3
10%

100 FV = ?
After n years (general case):
FVn = PV ( 1 + i )n
After 3 years:
FV3 = PV ( 1 + i )3
6-3
= $100 (1.10)3 =$133.10
What is the Present value (PV) of $100
due in 3 years, if I/YR = 10%?
 Finding the PV of a cash flow when compound
interest is applied is called discounting (the reverse
of compounding).
0 1 2 3
10%

PV=? 100
Solve the general FV equation for PV:
PV = FVn / ( 1 + i )n
PV = FV3 / ( 1 + i )3
= $100 / ( 1.10 )3
6-4
= $75.13
Annuity
Ordinary Annuity
0 1 2 3
i%

PMT PMT PMT


Annuity Due
0 1 2 3
i%

PMT PMT PMT


6-5
Future Value of Annuity (FVA)
Ordinary Annuity (i=12% ; PMT=$1000 ; n=4)

0 12% 1 2 3 4

1000 1000 1000 1000


FVA=?

 FVA = $ 4,779
6-6
Future Value of Annuity (FVA)
Annuity Due

0 12% 1 2 3 4

1000 1000 1000 1000


FVA=?

 = $ 4,779 * (1.12)
= $ 5,353

6-7
Present Value of Annuity (PVA)
Ordinary Annuity (i=3% ; PMT=$600 ; n=20)

0 3% 1 2 19 20

PVA=? 600 600 600 600

 
𝟏

[ 𝟏−
𝑷𝑽𝑨=𝑷𝑴𝑻 ( 𝟏+𝒊 ¿ . ¿ ¿ ¿
  𝒊
𝒏

]
 
𝟏

[
𝟏−
𝑷𝑽𝑨=𝟔𝟎𝟎 ( 𝟏 . 𝟎𝟑 ¿ . ¿ ¿ ¿
  𝟎 .𝟎𝟑
𝟐𝟎

]
𝑷𝑽𝑨=$ 𝟖 , 𝟗𝟐𝟔 𝒗𝒔. 𝑪𝒂𝒔𝒉 𝒑𝒓𝒊𝒄𝒆=$ 𝟏𝟎 , 𝟎𝟎𝟎
  6-8
Present Value of Annuity (PVA)
Annuity Due

0 3% 1 2 19 20
600 600 600 600
PVA=?

 = $ 8,926 * (1.03)
= $ 9,194

6-9
Perpetuity

0 15% 1 2 3 ∞
PV=? 100 100 100 100

 = $ 666.67

6-10
PV of uneven cash flow stream

= 300/(1.12)^3

= 500/(1.12)^5

6-11
FV of uneven cash flow stream

= 300*(1.12)^2

= 100*(1.12)^4

6-12
Semiannual compounding periods:
Adjustments needed

6-13
What is the FV of $100 after 3 years under
10% semiannual compounding? Quarterly
compounding?

i NOM mn
FVn  PV ( 1  )
m
 m  number of compounding periods
0.10 23
FVsemi  $100 ( 1  )
2
FVsemi  $100 (1.05) 6  $134.01
FVquart  $100 (1.025)  $134.49
12

6-14
Thank You

6-15

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