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Lecture Business finance - Chapter 3: The time value of money: An introduction to financial mathematics

In this chapter, you will learn: Understand and solve problems involving simple interest and compound interest, including accumulating, discounting and making comparisons using the effective interest rate; value, as at any date, contracts involving multiple cash flows; distinguish between different types of annuity and calculate their present and future values. | Chapter 3 The Time Value of Money: An Introduction to Financial Mathematics 2 2 2 2 2 2 2 2 2 Learning Objectives Understand and solve problems involving simple interest and compound interest, including accumulating, discounting and making comparisons using the effective interest rate. Value, as at any date, contracts involving multiple cash flows. Distinguish between different types of annuity and calculate their present and future values. 2 2 2 2 2 2 2 2 2 Learning Objectives (cont.) Apply knowledge of annuities to solve a range of problems, including problems involving principal-and-interest loan contracts. Distinguish between ordinary and general annuities and make basic calculations involving general annuities. 3 3 3 3 3 3 3 3 3 Fundamental Concepts Cash flows — fundamental to finance, the funds that flow between parties either now or in the future as a consequence of a financial contract. Rate of return — relates cash inflows to cash outflows. 4 4 4 4 4 4 4 4 4 Fundamental . | Chapter 3 The Time Value of Money: An Introduction to Financial Mathematics 2 2 2 2 2 2 2 2 2 Learning Objectives Understand and solve problems involving simple interest and compound interest, including accumulating, discounting and making comparisons using the effective interest rate. Value, as at any date, contracts involving multiple cash flows. Distinguish between different types of annuity and calculate their present and future values. 2 2 2 2 2 2 2 2 2 Learning Objectives (cont.) Apply knowledge of annuities to solve a range of problems, including problems involving principal-and-interest loan contracts. Distinguish between ordinary and general annuities and make basic calculations involving general annuities. 3 3 3 3 3 3 3 3 3 Fundamental Concepts Cash flows — fundamental to finance, the funds that flow between parties either now or in the future as a consequence of a financial contract. Rate of return — relates cash inflows to cash outflows. 4 4 4 4 4 4 4 4 4 Fundamental Concepts (cont.) Interest rate — special case of rate of return (used when the financial agreement is in the form of debt). Time value of money Money received now can be invested to earn additional cash (interest). Relates to opportunity cost of giving up money or resources for a period of time — either forgone investments or consumption, whatever the next best alternative is. 4 4 4 4 4 4 4 4 4 Time Value of Money An investment decision will involve an outlay of cash made in one period with the expectation of cash inflows in future periods. As a significant amount of time may elapse between the outflow of cash and the subsequent inflows, the significance of this time should be considered. To ignore differences in the timing of cash flows is to ignore the importance of the time value of money. Cash flows that occur at different points in time cannot simply be added together or subtracted — this is one of the critical issues conveyed in this chapter. 5 5 5 5 5 5 5 5 5 Simple Interest .