Ch 5: Introduction to Valuation: The Time Value of Money
why is a dollar received today worth more than a dollar received in the future?
today's dollar can be reinvested, yielding a greater amount in the future.
how to find the interest rate considering, pv=$100 fv=$1,000 N=10 years
r=(1000/100)∧(1/10)-1
the idea behind compounding is
that interest is earned on interest
if you invest for a single period at an interest rate of r, you money will grow to
(1+r) per dollar invested
methods that can be used to calculate present value
*algebraic formula *time value of money table *financial calculator
spreadsheet functions
*discount rate = RATE(nper,pmt,pv,fv) *present value = PV(rate,nper,pmt,fv) *future value = FV(rate,nper,pmt,pv)
using the future value approach to compound growth development can determine
*population growth *dividend growth *sales growth
future value (FV)
*the cash value of an investment at some time in the future fv=$1 x (1+r)∧t
*if the interest rate is 10% per year *$1 is invested for 10 years what is the present value discount factor
1 / (1.10)¹⁰ = .3855
present value (PV) formula
pv = $1 x [1/(1+r)∧t] = $1/(1+r)∧t
basic present value equation
pv = fv∨t / (1+r)∧t
