# Time Value of Money Essay

Chapter 9 The Time Value of Money

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Chapter 9- Learning Objectives

Identify various types of cash flow patterns (streams) that are observed in business. Compute (a) the future values and (b) the present values of different cash flow streams, and explain the results. Compute (a) the return (interest rate) on an investment (loan) and (b) how long it takes to reach a financial goal. Explain the difference between the Annual Percentage Rate (APR) and the Effective Annual Rate (EAR), and explain when each is more appropriate to use. Describe an amortized loan, and compute (a) amortized loan payments and (b) the balance (amount owed) on an amortized loan at a specific point during its life.

Principles of Finance

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Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Future Value

The amount to which a cash flow or series of cash flows will grow over a period of time when compounded at a given interest rate.

Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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12/9/2012

Future Value

How much would you have at the end of one year if you deposit $100 in a bank account that pays 5 percent interest each year?

FVn = FV1 = PV + INT = PV + PV(r) = PV (1 + r) = $100(1 + 0.05) = $100(1.05) = $105

Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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What’s the FV of an initial $700 after three years if r = 10%?

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10%

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700

FV = ?

Finding FV is Compounding

Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned,