BIWS - Financial Modeling Fundamentals - The Time-Value of Money

($ in Thousands)

Once Upon a Time at an Apartment in Korea… with a Guy Dressed in a Rabbit Suit

Option #1: Upfront deposit for 75% of the apartment's value, but you pay no monthly rent, and you get back the entire deposit at the
end of 2 years.

Option #2: Upfront deposit for 5% of the apartment's value, but you pay monthly rent equal to 0.5% of the apartment's value, and
you never get that rent back. You do get the deposit back at the end.

Apartment Value: $ 200

Option #1: Option #2:

Deposit %: 75.0% Deposit %: 5.0%

Deposit: $ 150 Deposit: $ 10

Deposit Difference: $ 140

Opportunity Cost: 10.0% Monthly Rent %: 0.5%
Monthly Rent: $ 1
This represents what you might earn by Annual Rent: 12
putting your money elsewhere, like a bank
account, another investment, or the stock market.

Option #1 - Large Upfront Deposit Sign-Up: Year 1 Year 2 So… is Option #1 or Option #2 better?
Annual Rent: $ - $ - $ -
Deposit (Paid) / Received Back: (150) - 150 It depends on your opportunity cost - what
Net Cash Flow: $ (150) $ - $ 150 else you could do with the money, and how
much it would yield!
"Money Lost": $ -

Lost Earnings: (14) (15)

"Money Lost" + Opportunity Cost Factored In: $ (29)

What The Deposit Received Back in Year 2 is Worth TODAY: $ 124 <----- This is called the "Present Value" of that $150 we
receive in the future, and it will come up A LOT in this course.
Why? Because…

Value of the Deposit: Sign-Up: Year 1 Year 2

Investment Value: $ 124 $ 136 $ 150

Option #2 - Smaller Deposit + Rent Sign-Up: Year 1 Year 2

Annual Rent: $ - $ (12) $ (12)
Deposit (Paid) / Received Back: (10) - 10
Net Cash Flow: $ (10) $ (12) $ (2)

"Money Lost": $ (24)