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RWJLT CH 05 TVM
RWJLT CH 05 TVM
of Corporate
FINANCE
SECOND EDITION
Stephen A. Ross
Randolph W. Westerfield
Bradford D. Jordan
Joseph Lim
Ruth Tan
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CHAPTER 5
INTRODUCTION TO VALUATION: TIME VALUE
OF MONEY (CALCULATOR)
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KEY CONCEPTS AND SKILLS
Be able to compute the future value of an investment
made today
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CHAPTER OUTLINE
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BASIC DEFINITIONS
Present Value earlier money on a time line
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FUTURE VALUES EXAMPLE 1
Suppose you invest $1,000 for one year at 5%
per year. What is the future value in one year?
Interest = 1,000(.05) = 50
Value in one year = principal + interest =
1,000 + 50 = 1,050
Future Value (FV) = 1,000(1 + .05) = 1,050
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FUTURE VALUES: GENERAL FORMULA
FV = PV(1 + r)t
FV = future value
PV = present value
r = period interest rate, expressed as a decimal
t = number of periods
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EFFECTS OF COMPOUNDING
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CALCULATOR KEYS
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FUTURE VALUES EXAMPLE 2
Suppose you invest the $1,000 from the
previous example for 5 years. How much
would you have?
5 N; 5 I/Y; 1,000 PV
CPT FV = -1,276.28
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FUTURE VALUES EXAMPLE 3
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FUTURE VALUE AS A
GENERAL GROWTH FORMULA
Suppose your company expects to
increase unit sales of widgets by 15%
per year for the next 5 years. If you
sell 3 million widgets in the current
year, how many widgets do you
expect to sell in the fifth year?
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QUICK QUIZ PART I
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PRESENT VALUES
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PRESENT VALUE ONE PERIOD
EXAMPLE
Calculator
1N
7 I/Y
10,000 FV
CPT PV = -9,345.79
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PRESENT VALUES EXAMPLE 2
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PRESENT VALUES EXAMPLE 3
CPT PV = -10,000
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PRESENT VALUE IMPORTANT
RELATIONSHIP I
For a given interest rate the longer the
time period, the lower the present value
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PRESENT VALUE IMPORTANT
RELATIONSHIP II
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QUICK QUIZ PART II
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THE BASIC PV EQUATION - REFRESHER
PV = FV / (1 + r)t
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DISCOUNT RATE
Often we will want to know what the implied
interest rate is on an investment
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DISCOUNT RATE EXAMPLE 1
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DISCOUNT RATE EXAMPLE 2
N=6
PV = -10,000
FV = 20,000
CPT I/Y = 12.25%
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DISCOUNT RATE EXAMPLE 3
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QUICK QUIZ PART III
What are some situations in which you
might want to know the implied interest
rate?
You are offered the following investments:
You can invest $500 today and receive $600 in 5
years. The investment is considered low risk.
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FINDING THE NUMBER
OF PERIODS
Start with the basic equation and solve for t
(remember your logs)
FV = PV(1 + r)t
t = ln(FV / PV) / ln(1 + r)
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NUMBER OF PERIODS EXAMPLE 1
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NUMBER OF PERIODS EXAMPLE 2
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NUMBER OF PERIODS EXAMPLE 2
CONTINUED
How much do you need to have in the future?
Down payment = .1(150,000) = 15,000
Closing costs = .05(150,000 15,000) = 6,750
Total needed = 15,000 + 6,750 = 21,750
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QUICK QUIZ PART IV
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SPREADSHEET EXAMPLE
Use the following formulas for TVM
calculations
FV(rate,nper,pmt,pv)
PV(rate,nper,pmt,fv)
RATE(nper,pmt,pv,fv)
NPER(rate,pmt,pv,fv)
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WORK THE WEB EXAMPLE
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TABLE 5.4
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COMPREHENSIVE PROBLEM
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CHAPTER 5 - CALCULATOR
END OF CHAPTER
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