Time Value Analysis

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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

Learning Objectives
• 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.

Single Cash Flow

0

1

2 Year

i%

100

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

Even Cash Flows: Annuity

0

1

2

3

i%

100

100

100

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

Uneven Cash Flows

0

1

2

3

i%

-50

100

75

50

Compounding

0

1

2

3

10%

100

FV = ?

Finding FVs (moving to the right

on a time line) is called compounding.

Discounting

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

0

1

2

3

10%

100

PV = ?

Three Ways to Solve TVM Problems
• Solve the equation with a regular calculator.
• Use a financial calculator.
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
Future Value of an Ordinary Annuity

0

1

2

3

10%

100

100

100

110

121

FV = 331

Present Value of an Ordinary Annuity

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

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