Ch 5: Introduction to Valuation: The Time Value of Money

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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


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