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Lawrence Gitman
Lawrence Gitman
Lawrence Gitman ***Rashmi Chaudhary***
Lawrence Gitman ***Rashmi Chaudhary***
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Lawrence Gitman ***Rashmi Chaudhary***
Which is more Valuable? 1000 $ now 1000 $ after 2 years ***Rashmi Chaudhary***
Which is more Valuable?
Which is more Valuable?
1000 $ now 1000 $ after 2 years
1000 $ now
1000 $ after 2 years
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***Rashmi Chaudhary***
Which is more Valuable? 1000 $ now 1000 $ after 2 years ***Rashmi Chaudhary***
Money NOW is worth more than money LATER! ***Rashmi Chaudhary***
Money NOW is worth more than money LATER!
Money NOW
is worth more than
money LATER!
Money NOW is worth more than money LATER! ***Rashmi Chaudhary***
***Rashmi Chaudhary***
***Rashmi Chaudhary***
Future Value Versus Present Value
Future Value Versus Present Value
Financial decisions are based on either future value or present value
Financial decisions are based on either
future value or present value
• Present value- cash in hand today
• Present value- cash
in hand today

Future value- cash you will receive at a future date

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Time Line  Horizontal line on which time zero appears at the left most end
Time Line
Time Line
 Horizontal line on which time zero appears at the left most end and future
 Horizontal line on which time
zero appears at the left most
end and future periods are
marked from left to right
 Used to depict investment cash
flows
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Time Line ***Rashmi Chaudhary***
Time Line
Time Line
Time Line ***Rashmi Chaudhary***
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Time Line ***Rashmi Chaudhary***

Future value- value at future date of a

present amount deposited and earning specified interest rate. (Compounding)

Present value-The current value of a future amount. The amount that have to be

invested today at a given interest rate over a specified period for a future amount.

(Discounting)

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invested today at a given interest rate over a specified period for a future amount. (Discounting)
invested today at a given interest rate over a specified period for a future amount. (Discounting)
invested today at a given interest rate over a specified period for a future amount. (Discounting)
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Types of Cash Flows Mixed Stream Annuities (a stream of Single Amounts (a stream of
Types of
Cash Flows
Mixed Stream
Annuities
(a stream of
Single Amounts
(a stream of equal
unequal cash
periodic cash flows)
flows )

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(a stream of Single Amounts (a stream of equal unequal cash periodic cash flows) flows )
Future value of Single Amount The General equation for the future value at end of
Future value of Single Amount
Future value of Single Amount
The General equation for the future value at end of period n is
The General equation for the future value at
end of period n is
FV n = PV X (1+i) n
FV n = PV X (1+i) n
Where, FV n = Future value at the end of period n PV= Present Value
Where,
FV n = Future value at the end of
period n
PV= Present Value
i= annual rate of interest paid

n= number of periods that money is left

for deposits

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Example

Example  Jane places $800 in a saving account paying 6% interest compounded annually. She wants
Example  Jane places $800 in a saving account paying 6% interest compounded annually. She wants

Jane places $800 in a saving account

paying 6% interest compounded annually. She wants to know how

much money will be in account at the

end of 5 years.

compounded annually. She wants to know how much money will be in account at the end
Now in this example PV = $800, i = 0.06, n = 5 So, FV
Now in this example PV = $800, i = 0.06, n = 5 So, FV

Now in this example

PV

= $800, i = 0.06, n = 5

So,

Now in this example PV = $800, i = 0.06, n = 5 So, FV n

FV n = PV X (1+i) n FV 5 = $800 X (1+0.06) 5 =$1070.40

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Future value Relationship (Interest rates, time periods, and future value of one dollar) ***Rashmi Chaudhary***
Future value Relationship (Interest rates, time periods, and future value of one dollar)
Future value Relationship
(Interest rates, time periods, and future value
of one dollar)
Future value Relationship (Interest rates, time periods, and future value of one dollar) ***Rashmi Chaudhary***
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Present Value of a Single Amount  The process of finding present value is often
Present Value of a Single Amount
Present Value of a Single
Amount
 The process of finding present value is often referred as discounting cash flow 
 The process of finding present
value is often referred as
discounting cash flow
 Inverse of compounding
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Example

Example Pam wishes to find the present value of $1700 that will be received 8 years
Example Pam wishes to find the present value of $1700 that will be received 8 years

Pam wishes to find the present value of

$1700 that will be received 8 years from

now. Opportunity cost is 8%

will be received 8 years from now. Opportunity cost is 8% We know, FV n =

We know, FV n = PV X (1+i) n so,

PV= FV n

= $1700 (1+8) 8

= $918.42

(1+i) n

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Comparing Present Value and Future Value ***Rashmi Chaudhary***
Comparing Present Value and Future Value
Comparing Present Value and
Future Value
Comparing Present Value and Future Value ***Rashmi Chaudhary***
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Types of Annuities
Types of Annuities

Ordinary Annuity -

cash flows occur at

the end of each

period

Annuity Due- cash

flows occur at the

beginning of each

period.

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occur at the end of each period • Annuity Due- cash flows occur at the beginning
occur at the end of each period • Annuity Due- cash flows occur at the beginning
occur at the end of each period • Annuity Due- cash flows occur at the beginning
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Future Value of an Ordinary Annuity  FVA n =PMT X (FVIA i , n

Future Value of an Ordinary

Annuity
Annuity


FVA n =PMT X (FVIA i,n )

Future Value of an Ordinary Annuity  FVA n =PMT X (FVIA i , n )
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 Frank wishes to determine how much money he will have at the end of
 Frank wishes to determine how much money he will have at the end of

Frank wishes to determine how much

money he will have at the end of 5 years if he chooses annuity A. i=7%

wishes to determine how much money he will have at the end of 5 years if
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Present Value of an ordinary annuity  PVA n = PMT X (PVIFA i ,
Present Value of an ordinary annuity
Present Value of an ordinary
annuity
Present Value of an ordinary annuity  PVA n = PMT X (PVIFA i , n

PVA n = PMT X (PVIFA i,n )

Present Value of an ordinary annuity  PVA n = PMT X (PVIFA i , n
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Braden wants to know what should it most pay to receive $700 at the end

Braden wants to know what

should it most pay to receive $700 at the end of each year
should it most pay to receive $700
at the end of each year
Braden wants to know what should it most pay to receive $700 at the end of
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Annuity Due  Future value of an annuity due  Present value of an annuity
Annuity Due
Annuity Due
 Future value of an annuity due  Present value of an annuity due
 Future value
of an
annuity due
 Present
value of an
annuity due

FVIA i,n (Annuity due)= FVIA i,n X (1+i)

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PVIFA i,n (annuity due)= PVIFA i,n X

(1+i)

Future value of a Mixed Stream

Future value of a Mixed Stream  Shrell expects a stream of mixed cash flows over
Future value of a Mixed Stream  Shrell expects a stream of mixed cash flows over

Shrell expects a stream of mixed cash

flows over the next five years and expects to earn 8%. What will be

earned after five years if cash flows

are immediately invested.

expects to earn 8%. What will be earned after five years if cash flows are immediately
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Present value of a mixed stream

Present value of a mixed stream  Frey has an opportunity of receving mixed stream cash
Present value of a mixed stream  Frey has an opportunity of receving mixed stream cash

Frey has an opportunity of receving

mixed stream cash flows over 5

years. If he must earn 9%, what is

the most he should pay.

receving mixed stream cash flows over 5 years. If he must earn 9%, what is the
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Application of time Value  Determining deposits needed to accumlate a future amount  Determination
Application of time Value
Application of time Value
 Determining deposits needed to accumlate a future amount  Determination of equal periodic loan
 Determining deposits needed to
accumlate a future amount
 Determination of equal periodic
loan payments
 EMI’s
 Finding interest rates
 Finding an unknown number of
periods
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Have a nice Day……………. ***Rashmi Chaudhary***
Have a nice Day……………. ***Rashmi Chaudhary***
Have a nice Day……………. ***Rashmi Chaudhary***
Have a nice Day……………. ***Rashmi Chaudhary***
Have a nice Day…………….
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