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## PowerPoint Slideshow about ' Time Value Analysis' - theophilus-stavros

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Learning Objectives

- Questions to be answered:
- What is time value of money?
- What is compounding? Discounting?
- How are the principles of time value analysis applied to the various types of cash flows?
- What different types of interest rates are used in finance?

Basic Concepts

- Why time value of money?
- Evaluating financial transactions
- Expected cash flows
- Risk

Time Lines

0

1

2

3

i%

CF0

CF1

CF2

CF3

Tick marksat ends of periods, so Time 0 is today; Time 1 is the end of Period 1; or the beginning of Period 2.

Even Cash Flows: Annuity

0

1

2

3

i%

100

100

100

Time line for an ordinary annuity of $100 for 3 years.

Compounding

0

1

2

3

10%

100

FV = ?

Finding FVs (moving to the right

on a time line) is called compounding.

Three Ways to Solve TVM Problems

- Solve the equation with a regular calculator.
- Use a financial calculator.
- Use a spreadsheet.

Time Value of A Lump Sum

- Future Value
- Present Value

Time Value of a Series of Even Cash Flows

- Types of Annuities
- Ordinary annuity
- Annuity due
- Perpetual annuity

- Future Value
- Present Value

Difference Between an OrdinaryAnnuity and an AnnuityDue

Ordinary Annuity

0

1

2

3

i%

PMT

PMT

PMT

Annuity Due

0

1

2

3

i%

PMT

PMT

PMT

PV

FV

Time Value of Uneven Cash Flows

- Present Value
- Sum of PVs of individual cash flow components

- Future Value
- Sum of FVs of individual cash flow components

Compounding Periods

- Periodic Rate
- iPer = iNom/m

- Annual Percentage Rate (APR)
- iNom = iPerx m

- Effective Annual Rate (EAR)
- EFF% = (1 + iNom/m)m – 1.0

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