OSU BA 360 - The Time Value of Money (57 pages)

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The Time Value of Money



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The Time Value of Money

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Pages:
57
School:
Oregon State University
Course:
Ba 360 - Introduction To Financial Management

Unformatted text preview:

Chapter 4 The Time Value of Money Part 2 Copyright 2010 Pearson Prentice Hall All rights reserved Learning Objectives 1 Compute the future value of multiple cash flows 2 Determine the future value of an annuity 3 Determine the present value of an annuity 4 Adjust the annuity formula for present value and future value for an annuity due and understand the concept of a perpetuity 5 Distinguish between the different types of loan repayments discount loans interest only loans and amortized loans 6 Build and analyze amortization schedules 7 Calculate waiting time and interest rates for an annuity Copyright 2010 Pearson Prentice Hall All rights reserved 4 2 4 1 Future Value of Multiple Payment Streams With unequal periodic cash flows treat each of the cash flows as a lump sum and calculate its future value over the relevant number of periods Sum up the individual future values to get the future value of the multiple payment streams Copyright 2010 Pearson Prentice Hall All rights reserved 4 3 FIGURE 4 1 The time line of a nest egg Copyright 2010 Pearson Prentice Hall All rights reserved 4 4 4 1 Future Value of Multiple Payment Streams continued Example 1 Future Value of an Uneven Cash Flow Stream Jim deposits 3 000 today into an account that pays 10 per year and follows it up with 3 more deposits at the end of each of the next three years Each subsequent deposit is 2 000 higher than the previous one How much money will Jim have accumulated in his account by the end of three years Copyright 2010 Pearson Prentice Hall All rights reserved 4 5 4 1 Future Value of Multiple Payment Streams Example 1 Answer FV PV x 1 r n FV of Cash Flow at T0 3 000 x 1 10 3 3 000 x 1 331 3 993 00 FV of Cash Flow at T1 5 000 x 1 10 2 5 000 x 1 210 6 050 00 FV of Cash Flow at T2 7 000 x 1 10 1 7 000 x 1 100 7 700 00 FV of Cash Flow at T3 9 000 x 1 10 0 9 000 x 1 000 9 000 00 Total 26 743 00 Copyright 2010 Pearson Prentice Hall All rights reserved 4 6 4 2 Future Value of an Annuity Stream Copyright



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