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Lecture Principles of Managerial finance (4th edition): Chapter 4 - Lawrence J. Gitman

Chapter 4 - Time value of money. Time-value-of-money techniques are widely used in personal financial planning. You can use them to calculate the value of savings at given future dates and to estimate the amount you need now to accumulate a given amount at a future date. | Chapter 4 Time Value of Money Learning Goals Discuss the role of time value in finance, the use of computational aids, and the basic patterns of cash flow. Understand the concept of future value and present value, their calculation for single amounts, and the relationship between them. Find the future value and the present value of both an ordinary annuity and an annuity due, and the present value of a perpetuity. Learning Goals (cont.) Calculate both the future value and the present value of a mixed stream of cash flows. Understand the effect that compounding interest more frequently than annually has on future value and the effective annual rate of interest. Describe the procedures involved in (1) determining deposits needed to accumulate to a future sum, (2) loan amortization, (3) finding interest or growth rates, and (4) finding an unknown number of periods. Question Would it be better for a company to invest $100,000 in a product that would return a total of $200,000 after one | Chapter 4 Time Value of Money Learning Goals Discuss the role of time value in finance, the use of computational aids, and the basic patterns of cash flow. Understand the concept of future value and present value, their calculation for single amounts, and the relationship between them. Find the future value and the present value of both an ordinary annuity and an annuity due, and the present value of a perpetuity. Learning Goals (cont.) Calculate both the future value and the present value of a mixed stream of cash flows. Understand the effect that compounding interest more frequently than annually has on future value and the effective annual rate of interest. Describe the procedures involved in (1) determining deposits needed to accumulate to a future sum, (2) loan amortization, (3) finding interest or growth rates, and (4) finding an unknown number of periods. Question Would it be better for a company to invest $100,000 in a product that would return a total of $200,000 after one year, or one that would return $220,000 after two years? The Role of Time Value in Finance Most financial decisions involve costs & benefits that are spread out over time. Time value of money allows comparison of cash flows from different periods. Answer It depends on the interest rate! The Role of Time Value in Finance (cont.) Most financial decisions involve costs & benefits that are spread out over time. Time value of money allows comparison of cash flows from different periods. Basic Concepts Future Value: compounding or growth over time Present Value: discounting to today’s value Single cash flows & series of cash flows can be considered Time lines are used to illustrate these relationships Computational Aids Use the Equations Use the Financial Tables Use Financial Calculators Use Electronic Spreadsheets Computational Aids (cont.) Computational Aids (cont.) Computational Aids (cont.) Computational Aids (cont.) Advantages Electronic Spreadsheets Spreadsheets go far beyond the .