Finance Basics Dr. Nargundkar PERS 2002.

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Presentation transcript:

Finance Basics Dr. Nargundkar PERS 2002

Classification Corporate Finance Personal Finance Capital Budgeting – where should we invest? Capital Structure – where do we get the money from? Net Working Capital – how do we manage day-to-day transactions? Personal Finance

Time Value of Money Present Value Future Value Interest Rates Nominal Periodic Effective http://www.teachmefinance.com

Interest Rates A bank charges 24% APR on a loan, payable monthly. What are the nominal, periodic and effective rates? APR of is the Annual Percentage Rate, and is the nominal rate for a year. Thus nominal rate = 24% If you pay monthly, you pay over 12 periods. The periodic rate is 24/12 =2% per month. The effective rate is based on what is actually paid out over the year. If you borrowed $100, you pay 100(1+0.02)12 = 100(1.2682) = $126.82 Thus the effective interest rate is 26.82%.

Present and Future Values You borrow $100 now, with a promise to pay 8% per year in interest, compounded annually. If you pay if all off at the end of 5 years, what is the amount you must pay? PV = 100 i = 8% n = 5 FV = PV(1+i)n = 100(1.08)5 = 100(1.4693) = $146.93

Present and Future Values - Exercise What is the present value of $ 1,000,000 that you hope to inherit in 20 years, if you assume an annual interest rate of 10%?