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Essentials of corporate finance - Chapter 4: Introduction to valuation: the time value of money

Chapter 4 introduction to valuation: The time value of money. After completing this unit, you should be able to compute the future value of an investment made today, be able to compute the present value of cash to be received at some future date, be able to compute the return on an investment. | Introduction to Valuation: The Time Value of Money Chapter 4 Key Concepts and Skills Be able to compute the future value of an investment made today Be able to compute the present value of cash to be received at some future date Be able to compute the return on an investment 4- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Chapter Outline Future Value and Compounding Present Value and Discounting More on Present and Future Values 4- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Basic Definitions Present Value – earlier money on a time line Future Value – later money on a time line Interest rate – “exchange rate” between earlier money and later money Discount rate Cost of capital Opportunity cost of capital Required return 4- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler It’s important to point out that there are many different ways to refer to the interest rate that we use in time value of money calculations. Students often get confused with the terminology, especially since they tend to think of an “interest rate” only in terms of loans and savings accounts. Future Values Suppose you invest $1000 for one year at 5% per year. What is the future value in one year? Interest = 1000(.05) = $50 Value in one year = principal + interest = 1000 + 50 = $1050 Future Value (FV) = 1000(1 + .05) = $1050 Suppose you leave the money in for another year. How much will you have two years from now? FV = 1000(1.05)(1.05) = 1000(1.05)2 = $1102.50 4- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler | Introduction to Valuation: The Time Value of Money Chapter 4 Key Concepts and Skills Be able to compute the future value of an investment made today Be able to compute the present value of cash to be received at some future date Be able to compute the return on an investment 4- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Chapter Outline Future Value and Compounding Present Value and Discounting More on Present and Future Values 4- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Basic Definitions Present Value – earlier money on a time line Future Value – later money on a time line Interest rate – “exchange rate” between earlier money and later money Discount rate Cost of capital Opportunity cost of capital Required return 4- Copyright