1. Finance Basics
Dr. Nargundkar
PERS 2002

2. 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

3. Time Value of Money Present Value Future Value Interest Rates
Nominal
Periodic
Effective

4. 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%.

5. 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

6. 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%?