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Lawrence Gitman
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Which is more Valuable?
1000 \$ now
1000 \$ after 2 years
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Money NOW
is worth more than
money LATER!
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Future Value Versus Present Value
Financial decisions are based on either
future value or present value
• 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 and future periods are
marked from left to right
 Used to depict investment cash
flows
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Time Line
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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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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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Future value of Single Amount
The General equation for the future value at
end of period n is
FV n = PV X (1+i) n
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

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.

Now in this example

 PV = \$800, i = 0.06, n = 5 So,

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)
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Present Value of a Single
Amount
 The process of finding present
value is often referred as
discounting cash flow
 Inverse of compounding
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Example

Pam wishes to find the present value of

\$1700 that will be received 8 years from

now. Opportunity cost is 8%

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
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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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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 5 years if he chooses annuity A. i=7%

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Present Value of an ordinary
annuity

PVA n = PMT X (PVIFA i,n )

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should it most pay to receive \$700
at the end of each year
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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

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.

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Present value of a mixed stream

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.

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Application of time Value
 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…………….
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