2. Copyright © 2007 Prentice-Hall. All rights reserved THE TIME VALUE OF MONEY PRESNET VALUE FUTURE VALUE

3. Copyright © 2007 Prentice-Hall. All rights reserved 2 Time Value of Money Interest – cost of using money Borrower – interest expense Lender – interest revenue

4. Copyright © 2007 Prentice-Hall. All rights reserved 3 Present Value 123456 $100,000 ????

5. Copyright © 2007 Prentice-Hall. All rights reserved 4 Present Value Depends on three factors: 1.Dollar amounts to be paid in the future 2.Length of time between investment and future payment 3.Interest rate

6. Copyright © 2007 Prentice-Hall. All rights reserved 5 Future Value 1 yr ????? $1,000 10% Interest = $1,000 x.10 = $100 Principal =1,000 Future value$1,100 Or Future value = 1,000 x 1.10 = $1,100 Present Value Future Value

7. Copyright © 2007 Prentice-Hall. All rights reserved 6 Present Value 1 yr ????? $1,100 10% Present value x 1.10 = $1,100 Present value = $1,100/1.10 Present value = $1,000 Present Value Future Value

8. Copyright © 2007 Prentice-Hall. All rights reserved 7 Present Value 1 yr ????? $1,100 10% Present value x 1.10 = $1,100 Present value = $1,100/1.10 Present value = $1,000 Present Value Future Value 2 yrs Present value x 1.10 = $1,000 Present value = $1,000/1.10 Present value = $909

9. Copyright © 2007 Prentice-Hall. All rights reserved 8 Present Value of $1 Table 1 yr ????? $1,100 10% Present Value Future Value 2 yrs Present Value = Future Value x Table Factor = $1,100 x 0.826 = $909

10. Copyright © 2007 Prentice-Hall. All rights reserved 9 Present Value of an Annuity 1 yr ????? $1,100 10% Present Value Future Value 2 yrs Present Value of $1,100 in one year: $1,100 x 0.909 = $1,000 $1,100 Present Value of $1,100 in two years: $1,100 x 0.826 = $909 $1,000 + $909 = $1,909

11. Copyright © 2007 Prentice-Hall. All rights reserved 10 Present Value of an Annuity Table 1 yr ????? $1,100 10% Present Value Future Value 2 yrs $1,100 Present Value of an Annuity = Payments x Table Factor = $1,100 x 1.736 = $1,909.60

12. Copyright © 2007 Prentice-Hall. All rights reserved WHAT DO YOU CALCULATE? PRESENT VALUE: $1 AN ANNUITY FUTURE VALUE: $1 AN ANNUITY ANNUITY: SAME AMOUNT FOR EACH PERIOD.

13. Copyright © 2007 Prentice-Hall. All rights reserved 12