VCU ECON 203 - Present Valuation (2 pages)

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Present Valuation



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Present Valuation

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A look into how money changes over time


Lecture number:
37
Pages:
2
Type:
Lecture Note
School:
Virginia Commonwealth University
Course:
Econ 203 - Introduction to Economics
Edition:
1

Unformatted text preview:

ECON 203 1nd Edition Lecture 37 Outline of Last Lecture I comparative advantage a self sufficiency b specialization c definition d example Outline of Current Lecture I Present valuation a Definition b Example c Real interest rate d Formula e Example f Example g Perpetuity Current Lecture I Present Valuation a Definition differently dated dollars are different economic goods b Ex suppose you have a choice of getting 100 today or 100 in a year Most people will choose to get the 100 today instead of waiting for the money What would it take for you to accept the money today c Real interest rate i Some people may accept 90 today instead of 100 in a year The real interest rate r is the premium for earlier availability of goods In this case r 0 1 or 10 to accept money now vs later d To find the value of something now vs later use PV FV 1 r n PV present value FV future value r interest rate n number of years until maturity e Ex what is 1000 in 1 year worth right now if r 5 PV 1000 1 0 05 1 952 38 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute What about if r 10 PV 1000 1 10 1 909 05 This shows that as r increases PV decreases f Ex what is 1000 in 1 year and then 1000 in 2 years worth now if r 10 PV 1000 1 1 1 1000 1 1 2 1735 53 g Perpetuity the option to be paid a set amount of money every set amount of time forever i PVperpetuity annual CF r CF cash flow ii If you get paid 50 every year for the rest of your life PV 50 0 05 1000



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