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Chapter 4 Intro to Valuation: Time Value of Money

Chapter 4 Intro to Valuation: Time Value of Money. Introduction/approach to TVM Future value of lump sum (compounding) Present value a lump sum (discounting) Determine interest rate Determine number of periods. Clicker Question.

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Chapter 4 Intro to Valuation: Time Value of Money

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  1. Chapter 4Intro to Valuation: Time Value of Money Introduction/approach to TVM Future value of lump sum (compounding) Present value a lump sum (discounting) Determine interest rate Determine number of periods Chapter 4: Time Value of Money (lump sums)

  2. Clicker Question If I save $3,000 per year for 40 years, earning 8% per year, how much will I have? Guess….. A. $120,000 B. $180,783 C. $240,178 D. $455,032 E. $777,170 Chapter 4: Time Value of Money (lump sums)

  3. Time Value of Money “The most powerful force in the universe is compound interest.” Albert Einstein (attributed) Uses: • Investing • Borrowing • Valuing • Decision making • Planning Chapter 4: Time Value of Money (lump sums)

  4. Introduction/approach to TVM • Importance of TVM • Analytical approach to TVM • Algebraic • TVM “factors” and tables • TVM on financial calculator • TVM with spreadsheet Chapter 4: Time Value of Money (lump sums)

  5. Introduction/approach to TVM • Comments on using the calculator • Clearing memory registers • Setting periods to 1 PY • TVM buttons • N, I, PV, PMT, FV • Cash flow buttons • CFj, NPV, IRR Chapter 4: Time Value of Money (lump sums)

  6. Future value of lump sum (compounding) • What is the future value of $100 invested today for 3 years at 10% interest per year? Chapter 4: Time Value of Money (lump sums)

  7. Future value of lump sum (compounding) • What is the future value of $100 invested today for 3 years at 10% interest per year? Chapter 4: Time Value of Money (lump sums)

  8. Present value a lump sum (discounting) • How much would I need to invest today to have $1000 in 2 years at 7% interest rate? Chapter 4: Time Value of Money (lump sums)

  9. Present value a lump sum (discounting) • How much would I need to invest today to have $1000 in 2 years at 7% interest rate? Chapter 4: Time Value of Money (lump sums)

  10. Clicker Question(determine interest rate) If I have $1,000 today to invest, what return would I require to have $2000 in 8 years? A. 6.19% B. 7.42% C. 8.24% D. 9.05% E. 9.97% Chapter 4: Time Value of Money (lump sums)

  11. Clicker Question(determine number of periods) How many years would it take to double my $1,000 investment if I received an interest rate of 6%? A. 6.2 years B. 8.1 years C. 10.1 years D. 10.6 years E. 11.9 years Chapter 4: Time Value of Money (lump sums)

  12. Algebra for Lump Sums Solve for interest rate Solve for N periods Chapter 4: Time Value of Money (lump sums)

  13. Clicker Question When compounding a present value: a) Future value _______________ as the interest rate increases; b) Future value ______________ as the number of periods increases. A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases E. decreases; remains the same Chapter 4: Time Value of Money (lump sums)

  14. Clicker Question When discounting a future value: As the interest rate decreases, present value ________;  As the number of periods decreases, present value ______ . • A. increases; increases • B. increases; decreases • C. decreases; increases • D. decreases; decreases • E. decreases; remains the same Chapter 4: Time Value of Money (lump sums)

  15. Clicker Question At what age do you want to retire (no longer have to work)? A. less than 55 years old B. 55 – 60 years old C. 60 – 65 years old D. 65 – 70 years old E. over 70 years old Chapter 4: Time Value of Money (lump sums)

  16. Clicker Question How much money do you plan to have saved (in today’s dollars) by the time you retire? A. less than $500,000 B. $500,000 - $750,000 C. $750,000 – $1 million D. $1 million – $1.5 million E. over $1.5 million Chapter 4: Time Value of Money (lump sums)

  17. Clicker Question What overall, long term return do you expect to get from your future investments? A. 3 – 7% B. 7 – 10% C. 10 – 13% D. 13 – 16% E. over 16% Chapter 4: Time Value of Money (lump sums)

  18. Chapter-end Homework Problems • Chapter 4 • Problems 1, 3, 5, 7, 9, 11, 13 Chapter 4: Time Value of Money (lump sums)

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