TOPIC 2 Time value of money.ppt
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1、ASSET EVALUATION,TOPIC 2,Time Value of Money,Topics Covered,Present Value & Future ValueAnnuity & PerpetuityEffective Annual Interest RateInflationCurrencies,Present Value,Present ValueValue today of a future cash flow.,Discount RateInterest rate used to compute present values of future cash flows.,
2、Discount FactorPresent value of a $1 future payment.,Calculation Recommendations,Four primary approaches to solving the problems. Using the formulas and a standard calculator. You will need basic algebra skills and a calculator that will raise numbers to a power and take roots. Using a financial cal
3、culator. A wide variety of financial calculators are available, in a wide range of prices. Using Excel on a personal computer. Excel contains built-in functions that will perform most Time Value of Money calculations. Using tables from the text. Before the ready accessibility of computing power, thi
4、s method was used for all TVM problems.,Definitions and Abbreviations,annuity: a series of payments or receipts having three specific characteristics, also called ordinary annuity or annuity in arrears(迟付年金).annuity due(即付年金): an annuity where the payments occur at the beginning of evenly spaced tim
5、e periods.CF0, CF1 , etc: cash flows, a series of payments or receipts or both. EAR: effective annual interest rate, the annual interest rate that reflects the effects of compounding.FV: future value, the accumulated value of an investment once all payments are made, including interest or return rec
6、eived.g: growth rate, we assume this is constant over time.r or i: interest rate.lump sum: a single payment or receipt, in contrast with annuity or perpetuity.n or t: number of time periods, months, half-years, years, etc.PMT or C: payment, the constant payment or receipt of an annuity or perpetuity
7、.perpetuity: a series of payments that never ends, where each payment is the same amount and the payments occur at the end of evenly spaced time periods.PV: present value, the value on a given date of a future payment or series of future payments.,Time Value of Money Formulas,Future value of a lump-
8、sum:Present value of a lump-sum:Present value of a perpetuity:Present value of an annuity:Future value of an annuity:,Time Value of Money Formulas,Present value of an annuity due:Future value of an annuity due:Present value of a perpetuity with constant growth:Present value of an annuity with consta
9、nt growth:Future value of an annuity with constant growth:,Compare with PV of an annuity,Compare with FV of an annuity,Present Values,Discount Factor = DF = PV of $1Discount Factors can be used to compute the present value of any cash flow.,Present Values,Discount Factors can be used to compute the
10、present value of any cash flow.,Present Values,Replacing “1” with “t” allows the formula to be used for cash flows that exist at any point in time.,Present Values,ExampleYou just bought a new computer for $3,000. The payment terms are 2 years same as cash. If you can earn 8% on your money, how much
11、money should you set aside today in order to make the payment when due in two years?,Present Values,ExampleYou just bought a new computer for $3,000. The payment terms are 2 years same as cash. If you can earn 8% on your money, how much money should you set aside today in order to make the payment w
12、hen due in two years?,Present Values,PVs can be added together to evaluate multiple cash flows.,Present Values,Given two dollars, one received a year from now and the other two years from now, the value of each is commonly called the Discount Factor. Assume r1 = 20% and r2 = 7%.,Present Values,Given
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