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# Time Value Analysis - PowerPoint PPT Presentation

Time Value Analysis. Corporate Finance. Dr. A. DeMaskey. 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?

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

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### Time Value Analysis

Corporate Finance

• 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?

• Why time value of money?

• Evaluating financial transactions

• Expected cash flows

• Risk

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.

0

1

2 Year

i%

100

Time line for a \$100 lump sum due at the end of Year 2.

0

1

2

3

i%

100

100

100

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

0

1

2

3

i%

-50

100

75

50

0

1

2

3

10%

100

FV = ?

Finding FVs (moving to the right

on a time line) is called compounding.

Finding PVs is discounting, and it’s the reverse of compounding.

0

1

2

3

10%

100

PV = ?

• Solve the equation with a regular calculator.

• Use a financial calculator.

• Future Value

• Present Value

• Types of Annuities

• Ordinary annuity

• Annuity due

• Perpetual annuity

• Future Value

• Present Value

0

1

2

3

10%

100

100

100

110

121

FV = 331

0

1

2

3

10%

100

100

100

90.91

82.64

75.13

248.69 = PV

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

• Present Value

• Sum of PVs of individual cash flow components

• Future Value

• Sum of FVs of individual cash flow components

• Periodic Rate

• iPer = iNom/m

• Annual Percentage Rate (APR)

• iNom = iPerx m

• Effective Annual Rate (EAR)

• EFF% = (1 + iNom/m)m – 1.0