1 / 15

Time Decision

Time Decision. Time decisions. The principle to be discussed in this chapter involves expenditures that must be made several years before returns are obtained. Value of $1,00 Compounded Annually at Specified Interest Rates for Periods Up to 20 years.

buck
Download Presentation

Time Decision

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Time Decision

  2. Time decisions • The principle to be discussed in this chapter involves expenditures that must be made several years before returns are obtained.

  3. Value of $1,00 Compounded Annually at Specified Interest Rates for Periods Up to 20 years.

  4. Present Value of $1,00 To Be Received in the year Specified

  5. INTEREST- a payment made for the use of money over a period of time. • INTEREST RATE - The price of using the money over a period of time

  6. COMPOUNDING - calculating the future value • FUTURE VALUE FACTOR - The value by which a present value must be multiplied to calculate its future value • COMPOUNDING - Calculation of the future value of a present sum accounting for the rate of interest FVF=(1+i)n FV=PV*(1+i)n

  7. AN EXAMPLE FOR CALCULATING COMPOUNDED VALUE • What is the future value of 4,000$ after 8 months, where the compound interest rate is 2% per month pv=4,000 i=0.02 n=8 fv=? • F.V.F=(1+0.02)8=1.1717FV=4,000*1.1717=4,686.6

  8. DISCOUNTING – calculating the present value • Present Value Factor - The value by which a future value must be multiplied to calculate its present value • Discounting - Calculationof the present value of the future sum 1 (1+i)n PVF=

  9. An Example for Calculating Present Value (Discounting) What is the present value of $2000 due in 10 years at 5% ? fv=2000 i=0.05 n=10 pv=?pvf=1/ (1+0.05)10 =0.6139pv=2000*0.6139 =1227.83

  10. Present Value Annuity Factor • Denotes the present value of a series of equal sums of $1 each, appearing during n periods of time at i interest rate • a - the annual sum • n - number of periods of time the sum appears • i - interest rate (1+i)n-1pvaf= i*(1+i)n

  11. PVAF - EXAMPLE • We need to buy a new machine We are offered to pay 3200$ in cash or 500 a year, for 10 years. • Which way should we prefer , if the interest rate is 8%?i=8%n=10a=500pv=? (1+0.08)10-1 0.08* (1+0.08)10 pv=500* 6.7101 =3355 pvaf= =6.7101

  12. Future Value Annuity Factor • Denotes the future value of a series of sums of $1 each, appearing during n periods of time at i interest rate . (1+i)n-1 FVAF= i

  13. FVAF - EXAMPLE • We want to save money to buy a new asset in 8 years.The asset’s price is 3,000$ interest rate is 5%.Is 300$ a year enough?FVAF(5%,8) = 9.5491 300*9.5491=2864.73 • Conclusion - 300$ a year would not be enough.

  14. CAPITAL RECOVERY FACTOR • is used to distribute a single amount invested today over a uniform series of end year payments which have a present value equal to the amount invested today.i*(1+i) n (1+i) n - 1 where a= end year payment i= interest rate n= number of years CRF=

  15. Capital Recovery Payments - Example • A loan of 90,000$ was taken for 20 years at an interest rate of 5% a year, what are the annual payment required to recover the loan. • pv=90,000n=20 i=5% a=? CRF(5%,20)=0.080290,000*0.0802=7,218

More Related