Time Value of Money and

FORMULA 9 Inflation

Example: A car loan requiring quarterly

payments carries a APR of 8%. What is the Effective annual interest rate (EAR) is interest
effective annual rate of interest? rate that is annualized using compounding 
m: numbers of times compounding in a year interest.

FORMULA 8
Effective Annual Interest
Annual Percentage rate (APR) is interest rate
that is annualized using simple interest
Rates

You hope to buy a car in 2 years. Instead of

putting aside one sum in the bank to finance
the purchase, you plan to save some amount
of money each year.
Introduction
Suppose that the car purchase can be put off
for an additional year and that you can make a
third deposit of $1,000 at the end of the second
year. How much will be available so spend 3
Future Value of Multiple Cash Flows
Principles 9

years from now?

To find the value at some future date of a

stream of cash flows, calculate what EACH
Corporate Finance -
Time Value of Money (TVM)
Lecture Note 2:
22
cash flow will be worth at that future date and
then ADD UP these future values. Principle

The stream of cash flows: there are many Time Value of

payments
Money & Cash Flow Future Values and 12
Compound Interest
Here is how your bank balance would change Discounted Model
as you make each payment. Interest rate = 8% r = 8%

How much that cash flow would be worth

today? Present Value 11

Present Value of Multiple Cash Flows

The present value of a stream of future cash

flows is the amount you need to invest today
to generate that stream
Principles

To find the present value of a stream of cash

flows, calculate what EACH cash flow will be
worth at the present date and then ADD UP
these present values.

Future value

FORMULA 3
the first payment
occurs at the end of the
period Ordinary Annuity Multiple Cash Flow

Present value

FORMULA 4

equally spaced level stream of

cash flows, with a finite maturity Annuities

Future value

FORMULA 5

streams of cash payments

often start immediately Annuity Due Level Cash Flows

Present value

FORMULA 6

stream of level cash payments that never ends Perpetuities

FORMULA 7