Chapter 4 – Introduction to Valuation: The Time Value of Money

A dollar today is worth more than a dollar tomorrow!!! How much more, that is the question.

Future Value
Suppose you have $100 and invest it for 1 year at 10%. How much will you have at the end of
the year?

How much will you have in 2 years?

Why isn’t it $120? Where did the extra $1 come from?

General Equations
FV = PV(1 + r)t

FV = PV(FVIFr,t)

You have $20,000 to invest. If you can earn 9% per year, how much will you have in ten years?

The GDP will grow at 2.5% for the next three years. The current GDP is $13,841.3 (billions).
What will it be in three years?

Fin 311 Chapter 4 Handout Page 1

You plan to purchase Apple stock for $185.00. You expect the share price to grow at 6% for the
next 10 years. What will the price be in 10 years?

You plan to invest $1,500 in a financial asset with a rate of return of 12 percent. What will the
vale of the asset be in 35 years?

Present Value
1
Remember: FV = PV(1 + r)t PV FV t
→ PV = FV(PVIFr,t)
1 r

NOTE: The PFIV is just the inverse of the FVIF

Suppose you need $110 in 1 year and you can invest at 10%. How much must you invest now?

Suppose you need $121 in 2 years and you can invest at 10%. How much must you invest now?

Page 2 Fin 311 Chapter 4 Handout

Suppose you need $20,000 in 10 years. If you can earn 9% per year, how much do you have to
invest today?

You will inherit $1.5 million in 40 years. Your bank is the trustee and will allow you to borrow
against your inheritance. What is the maximum you can borrow? Assume r = 18%.

Interest Rate
Remember FV = PV(1 + r)t, we can solve for t.
1 1
FV t FV t FV t
1 r 1 r r 1
PV PV PV

You purchased one share of Apple stock in 1982 for $2.50. In 2007, (25 years later) it is valued
at $185 per share. What is the average growth rate?

Fin 311 Chapter 4 Handout Page 3

 The GDP doubled between 1987 and 2007 (20 years). What is the
average growth rate of the GDP?

Number of Periods
Remember FV = PV(1 + r)t, we can solve for t.

FV
ln
FV t FV PV
1 r ln t ln 1 r t
PV PV ln 1 r

Suppose you want to buy lawn mower. You currently have $500 and the mower you want costs
$1,500. If you can earn 8%, how long will you have to wait to buy the mower?

Page 4 Fin 311 Chapter 4 Handout

You want to buy a car. You know your grandparents will give you $10,000 when you
graduation. You have researched the car market and decided you will buy a Honda Accord. It
will cost $17,500 and you want to pay cash for it. You can invest the $10,000 gift at 12 percent.
How long before you can buy the car?

Fin 311 Chapter 4 Handout Page 5

Using the calculator
Future Value
You have $20,000 to invest. If you can earn 9% per year, how much will you have in ten years?

FV = $20,000(FVIF9%,10)

N
I
PV
Pmt
Cpt FV

The GDP will grow at 2.5% for the next three years. The current GDP is $13,841.3 (billions).
What will it be in three years?

FV = $13,841.3(FVIF2.5%,3)

N
I
PV
Pmt
Cpt FV

You plan to purchase Apple stock for $185.00. You expect the share price to grow at 6% for the
next 10 years. What will the price be in 10 years?

FV = 185(FVIF6%,10)

N
I
PV
Pmt
Cpt FV

Page 6 Fin 311 Chapter 4 Handout

You plan to invest $1,500 in a financial asset with a rate of return of 12 percent. What will the
value of the asset be in 35 years?

FV = $1,500(FVIF12%,35)

N
I
PV
Pmt
Cpt FV

Present Value
Suppose you need $110 in 1 year and you can invest at 10%. How much must you invest now?

PV = 110(PVIF10%,1)

N
I
Cpt PV
Pmt
FV

Suppose you need $121 in 2 years and you can invest at 10%. How much must you invest now?

PV = 121(PVIF10%,1)

N
I
Cpt PV
Pmt
FV

Fin 311 Chapter 4 Handout Page 7

Suppose you need $20,000 in 10 years. If you can earn 9% per year, how much do you have to
invest today?

PV = 20,000(PVIF9%,10)

N
I
Cpt PV
Pmt
FV

You will inherit $1.5 million in 40 years. Your bank is the trustee and will allow you to borrow
against your inheritance. What is the maximum you can borrow? Assume r = 18%.

PV = 1,500,000(PVIF18%,40)

N
I
Cpt PV
Pmt
FV

Interest Rate
You purchased one share of Apple stock in 1982 for $2.50. In 2007, (25 years later) it is valued
at $185 per share. What is the average growth rate?

2.50 = 185(PVIFr,25) or 185 = 2.50(FVIFr,25)

N
Cpt I
PV
Pmt
FV

Page 8 Fin 311 Chapter 4 Handout

The GDP doubled between 1987 and 2007 (20 years). What is the average growth rate of the
GDP?

1 = 2(PVIFr,20) or 2 = 1(FVIFr,20)

N
Cpt I
PV
Pmt
FV

Eight years ago, you invested $10,000 in an account that is now worth $22,000. What interest
rate per year did you earn?

10,000 = 22,000(PVIFr,8) or 22,000 = 10,000(FVIFr,8)

N
Cpt I
PV
Pmt
FV

An avid art collector bought a famous painting for $8.5 million. Unfortunately, when he sold the
painting 7 years later, he only received $6.4 million. What was his rate of return on this
investment?

8.5 = 6.4(PVIFr,7) or 6.4 = 8.5(FVIFr,7)

N
Cpt I
PV
Pmt
FV

Fin 311 Chapter 4 Handout Page 9

Number of Periods
Suppose you want to buy lawn mower. You currently have $500 and the mower you want costs
$1,500. If you can earn 8%, how long will you have to wait to buy the mower?

500 = 1,500(PVIF8%,t) or 1,500 = 500(FVIF8%,t)

Cpt N
I
PV
Pmt
FV

You want to buy a car. You know your grandparents will give you $10,000 when you
graduation. You have researched the car market and decided you will buy a Honda Accord. It
will cost $17,500 and you want to pay cash for it. You can invest the $10,000 gift at 12 percent.
How long before you can buy the car?

10,000 = 17,500(PVIF12%,t) or 17,500 = 10,000(FVIF12%,t)

Cpt N
I
PV
Pmt
FV

You just won the lottery and received $25,000. You want to invest the money until you have
enough to buy a $110,000 car. If you can earn 11 percent per year, how long do you have to wait
until you buy the car?

25,000 = 110,000(PVIF11%,t) or 110,000 = 25,000(FVIF11%,t)

Cpt N
I
PV
Pmt
FV

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