To understand better the role of financial managers, you must be familiar with the environments in which they operate. The form of business organization that a firm chooses is one aspect of the business setting in which it must function. We will explore the advantages and disadvantages of the various alternative forms of business organization. | Chapter 3 Time Value of Money © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI The Time Value of Money The Interest Rate Simple Interest Compound Interest Amortizing a Loan Obviously, $10,000 today. You already recognize that there is TIME VALUE TO MONEY!! The Interest Rate Which would you prefer -- $10,000 today or $10,000 in 5 years? TIME allows you the opportunity to postpone consumption and earn INTEREST. Why TIME? Why is TIME such an important element in your decision? Types of Interest Compound Interest Interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent). Simple Interest Interest paid (earned) on only the original amount, or principal borrowed (lent). Simple Interest Formula Formula SI = P0(i)(n) SI: Simple Interest P0: Deposit today (t=0) i: Interest Rate per Period n: Number of Time Periods SI = P0(i)(n) = $1,000(.07)(2) = $140 Simple Interest Example Assume that you deposit $1,000 in an account earning 7% simple interest for 2 years. What is the accumulated interest at the end of the 2nd year? FV = P0 + SI = $1,000 + $140 = $1,140 Future Value is the value at some future time of a present amount of money, or a series of payments, evaluated at a given interest rate. Simple Interest (FV) What is the Future Value (FV) of the deposit? The Present Value is simply the $1,000 you originally deposited. That is the value today! Present Value is the current value of a future amount of money, or a series of payments, evaluated at a given interest rate. Simple Interest (PV) What is the Present Value (PV) of the previous problem? Why Compound Interest? Future Value (. Dollars) Assume that you deposit $1,000 at a compound interest rate of 7% for 2 years. Future Value Single Deposit (Graphic) 0 1 2 $1,000 FV2 7% FV1 = P0 (1+i)1 = $1,000 () = $1,070 Compound Interest You earned $70 interest on your $1,000 deposit over the . | Chapter 3 Time Value of Money © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI The Time Value of Money The Interest Rate Simple Interest Compound Interest Amortizing a Loan Obviously, $10,000 today. You already recognize that there is TIME VALUE TO MONEY!! The Interest Rate Which would you prefer -- $10,000 today or $10,000 in 5 years? TIME allows you the opportunity to postpone consumption and earn INTEREST. Why TIME? Why is TIME such an important element in your decision? Types of Interest Compound Interest Interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent). Simple Interest Interest paid (earned) on only the original amount, or principal borrowed (lent). Simple Interest Formula Formula SI = P0(i)(n) SI: Simple Interest P0: Deposit today (t=0) i: Interest Rate per Period n: Number of Time Periods SI = P0(i)(n) = $1,000(.07)(2) = $140 Simple .
