Chapter 5, the time value of money. After studying this chapter you will be able to: How to determine the future value of an investment made today, how to determine the present value of cash to be received at a future date, how to fi nd the return on an investment, how long it takes for an investment to reach a desired value. | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 5: The Time Value of Money NEED UPDATED PHOTO Copyright© 2015 John Wiley & Sons, Inc. 2 Learning Objectives Explain time value of money and its importance to the field of finance. Explain the concept of future value, including the meaning of the terms principal, simple interest and compound interest, and use the future value formula to make business decisions. Explain the concept of present value and how it relates to future value, and use the present value formula to make business decisions. Discuss why the concept of compounding is not restricted to money, and use the future value formula to calculate growth rates. Copyright© 2015 John Wiley & Sons, Inc. 3 Value of saving $108,000 at 5% for different time periods differs due to Time Value of Money Copyright© 2015 John Wiley & Sons, Inc. 4 All three saved $108,000 towards retirement at 5%. Maria saved only $200 a month and has $428,479 at age 70, Sarinda saved $300 a month and has $266,135 at retirement, Joan saved $600 a month and has only $175,946 at retirement. Although they saved the same total amount of $108,000, Time Value of Money (compounding) helped Maria save almost times as much as Joan. 4 Copyright© 2015 John Wiley & Sons, Inc. What is the Time Value of Money? The choice between spending today and spending tomorrow A dollar can be spent now, or invested to earn interest A dollar invested and earning interest increases wealth and the ability to consumer later The rate of interest determines the trade-off between consumption today and investing for the future The time value of money (TVM) is the difference between a dollar in hand today and a dollar promised in the future A dollar today is worth more than a dollar in the future because we can earn interest on today’s dollar Future Value vs. Present Value Future Value (FV) measures the value of | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 5: The Time Value of Money NEED UPDATED PHOTO Copyright© 2015 John Wiley & Sons, Inc. 2 Learning Objectives Explain time value of money and its importance to the field of finance. Explain the concept of future value, including the meaning of the terms principal, simple interest and compound interest, and use the future value formula to make business decisions. Explain the concept of present value and how it relates to future value, and use the present value formula to make business decisions. Discuss why the concept of compounding is not restricted to money, and use the future value formula to calculate growth rates. Copyright© 2015 John Wiley & Sons, Inc. 3 Value of saving $108,000 at 5% for different time periods differs due to Time Value of Money Copyright© 2015 John Wiley & Sons, Inc. 4 All three saved $108,000 towards .
