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BA 215 Time Value of Money

BA 215 Time Value of Money. A dollar today is worth more than a dollar one year from now. The reason for this is that money is an asset that can be invested. It will then generate returns over time. This has nothing to do with inflation.

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BA 215 Time Value of Money

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  1. BA 215Time Value of Money • A dollar today is worth more than a dollar one year from now. • The reason for this is that money is an asset that can be invested. It will then generate returns over time. • This has nothing to do with inflation. • The discount rate is a measure of the time value of money.

  2. Time Value of Money • Possible measures of the discount rate • Cost of Capital; equity, debt, or a weighted average. • Cost of Debt • Interest rate on borrowing • Cost of Equity • This is difficult to measure • The Opportunity Cost of Investment • This is another measure of the cost of capital • Hurdle rates • Rules of thumb for investment decisions

  3. Net Present Value Table 1 (p. 267) Number of Periods9%10%12% 1 .917 .909 .893 2 .842 .826 .797 3 .772 .751 .712 4 .708 .683 .636 5 .650 .621 .567 = 0.751

  4. Net Present Value Table 1 Table 2 Number of Periods9%10%12%10% 1 .917 .909 .893 0.909 2 .842 .826 .797 1.736 3 .772 .751 .712 2.487 4 .708 .683 .636 3.170 5 .650 .621 .567 3.791

  5. Net Present Value Table 1 Table 2 Number of Periods9%10%12%10% 1 .917 .909 .893 0.909 2 .842 .826 .797 1.736 3 .772 .751 .712 2.487 2.486

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