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    Time Value of Money Time Value of Money

    Uploaded by

    Ahmad Khan
    This document discusses the time value of money, including simple and compound interest, future value, and present value. It provides formulas and examples for calculating interest, future values, and present values. The key points are: - Time value of money recognizes that money available at present is worth more than the same amount in the future due to interest. - Compound interest earns interest on previous interest amounts as well as principal, resulting in higher total interest than simple interest which earns interest only on principal. - Future value formulas calculate the amount today's investment will be worth in the future, while present value formulas determine the amount needed now to achieve a future sum.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Time Value of Money Time Value of Money

    Uploaded by

    Ahmad Khan
    9 views19 pages
    This document discusses the time value of money, including simple and compound interest, future value, and present value. It provides formulas and examples for calculating interest, future values, and present values. The key points are: - Time value of money recognizes that money available at present is worth more than the same amount in the future due to interest. - Compound interest earns interest on previous interest amounts as well as principal, resulting in higher total interest than simple interest which earns interest only on principal. - Future value formulas calculate the amount today's investment will be worth in the future, while present value formulas determine the amount needed now to achieve a future sum.

    Original Title

    Lecture 04

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    © © All Rights Reserved

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    This document discusses the time value of money, including simple and compound interest, future value, and present value. It provides formulas and examples for calculating interest, future values, and present values. The key points are: - Time value of money recognizes that money available at present is worth more than the same amount in the future due to interest. - Compound interest earns interest on previous interest amounts as well as principal, resulting in higher total interest than simple interest which earns interest only on principal. - Future value formulas calculate the amount today's investment will be worth in the future, while present value formulas determine the amount needed now to achieve a future sum.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    9 views19 pages

    Time Value of Money Time Value of Money

    Uploaded by

    Ahmad Khan
    This document discusses the time value of money, including simple and compound interest, future value, and present value. It provides formulas and examples for calculating interest, future values, and present values. The key points are: - Time value of money recognizes that money available at present is worth more than the same amount in the future due to interest. - Compound interest earns interest on previous interest amounts as well as principal, resulting in higher total interest than simple interest which earns interest only on principal. - Future value formulas calculate the amount today's investment will be worth in the future, while present value formulas determine the amount needed now to achieve a future sum.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 19

    Time

    Time Value
    Value of
    of
    Money
    Money
    1
    The
    The Time
    Time Value
    Value of
    of Money
    Money
     The Interest Rate
     Simple Interest
     Compound Interest
     Future Value
     Present Value

    2
    The
    The Interest
    Interest Rate
    Rate
    Which would you prefer -- $10,000
    today or $10,000 in 5 years?
    years

    Obviously, $10,000 today.


    today

    You already recognize that there is


    TIME VALUE TO MONEY!!
    MONEY

    3
    Why
    Why TIME?
    TIME?

    Why is TIME such an important


    element in your decision?

    TIME allows you the opportunity to


    postpone consumption and earn
    INTEREST.
    INTEREST

    4
    Types
    Types of
    of Interest
    Interest
     Simple Interest
    Interest paid (earned) on only the original
    amount, or principal, borrowed (lent).
     Compound Interest
    Interest paid (earned) on any previous
    interest earned, as well as on the
    principal borrowed (lent).

    5
    Simple
    Simple Interest
    Interest Formula
    Formula

    Formula SI = P0(i)(n)
    SI: Simple Interest
    P0 : Deposit today (t=0)
    i: Interest Rate per Period
    n: Number of Time Periods
    6
    Simple
    Simple Interest
    Interest Example
    Example
     Assume that you deposit $1,000 in an
    account earning 7% simple interest for
    2 years. What is the accumulated
    interest at the end of the 2nd year?
     SI = P0(i)(n)
    = $1,000(.07)(2)
    = $140
    7
    Simple
    Simple Interest
    Interest (FV)
    (FV)
     What is the Future Value (FV)
    FV of the
    deposit?
    FV = P0 + SI
    = $1,000 + $140
    = $1,140
     Future Value is the value at some future
    time of a present amount of money, or a
    series of payments, evaluated at a given
    interest rate.
    8
    Simple
    Simple Interest
    Interest (PV)
    (PV)
     What is the Present Value (PV)
    PV of the
    previous problem?
    The Present Value is simply the
    $1,000 you originally deposited.
    That is the value today!
     Present Value is the current value of a
    future amount of money, or a series of
    payments, evaluated at a given interest
    9
    rate.
    Future
    Future Value
    Value
    Single
    Single Deposit
    Deposit (Graphic)
    (Graphic)
    Assume that you deposit $1,000 at
    a compound interest rate of 7% for
    2 years.
    years
    0 1 2
    7%
    $1,000
    FV2
    10
    Future
    Future Value
    Value
    Single
    Single Deposit
    Deposit (Formula)
    (Formula)
    FV1 = P0 (1+i)1 = $1,000 (1.07)
    = $1,070
    Compound Interest
    You earned $70 interest on your $1,000
    deposit over the first year.
    This is the same amount of interest you
    would earn under simple interest.
    11
    Future
    Future Value
    Value
    Single
    Single Deposit
    Deposit (Formula)
    (Formula)
    FV1 = P0 (1+i)1 = $1,000 (1.07) =
    $1,070
    FV2 = FV1 (1+i)1 = P0 (1+i)(1+i) =
    $1,000(1.07)(1.07)
    $1,000 = P0 (1+i)2 =
    $1,000(1.07)
    $1,000 2 = $1,144.90

    You earned an EXTRA $4.90 in Year 2 with


    compound over simple interest.
    12
    General
    General Future
    Future
    Value
    Value Formula
    Formula
    FV1 = P0(1+i)1
    FV2 = P0(1+i)2
    etc.

    General Future Value Formula:


    FVn = P0 (1+i)n

    13
    Story
    Story Problem
    Problem Example
    Example
    Julie Miller wants to know how large her deposit
    of $10,000 today will become at a compound
    annual interest rate of 10% for 5 years.
    years

    0 1 2 3 4 5
    10%
    $10,000
    FV5
    14
    The
    The “Rule-of-72”
    “Rule-of-72”

    Quick! How long does it take to double


    $5,000 at a compound rate of 12% per
    year (approx.)?

    Approx. Years to Double = 72 / i%

    72 / 12% = 6 Years
    [Actual Time is 6.12 Years]
    15
    Present
    Present Value
    Value
    Single
    Single Deposit
    Deposit (Graphic)
    (Graphic)
    Assume that you need $1,000 in 2 years.
    Let’s examine the process to determine
    how much you need to deposit today at a
    discount rate of 7% compounded annually.
    0 1 2
    7%
    $1,000
    PV0 PV1
    16
    Present
    Present Value
    Value
    Single
    Single Deposit
    Deposit (Formula)
    (Formula)
    PV0 = FV2 / (1+i)2 = $1,000 / (1.07)2
    = FV2 / (1+i)2 = $873.44

    0 1 2
    7%
    $1,000
    PV0
    17
    General
    General Present
    Present
    Value
    Value Formula
    Formula
    PV0 = FV1 / (1+i)1
    PV0 = FV2 / (1+i)2
    etc.

    General Present Value Formula:


    PV0 = FVn / (1+i)n
    or PV0 = FVn (PVIFi,n) -- See Table II
    18
    19
    Th
    an
    k
    Yo
    u!

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