investment analysis chapter #8. time value of money u how does time affect money? u does money...
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InvestmentAnalysis
Chapter #8
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Time Value of Money
How does time affect money? Does money increase or decrease over
time?
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Borrowing Money What is interest? Money paid as the cost of borrowing What is principal? The money that is borrowed
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What is Compounding? Extended period of time Interest paid on principal and on interest Also used to determine the value of
today’s money in the future If you invest now, what will you have at
a later time?
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What is Discounting?
The opposite of compounding Tells you the present value of a future
amount of money If you want a certain amount of money
in the future, how much do you need to invest today
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Future Value of Money
FV = (1+interest) raised to n where n = years Ex: what is the Value of $100 in 10
years at 10% interest? FV = (1 + .10)10 FV = 259.37
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Compounding Tables Page 8-4 What is the Future Value of: $250 invested at 8% over 19 years $15,000 invested at 4% over 25 years $1800 invested at 6% over 12 years $2800 invested at 5% over 5 years
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Present Value of Money
PV = 1/(1+ interest) raised to n where n = years What is the present value of $1 to be
received in 10 years at 10% interest? PV = 1/(1+.10)10 PV = $0.3855
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Discounting Tables Table on Page 8-5 What is the present value of $10,000 to be
received in 10 years at 4% interest? What is the present value of $600 to be
received in 4 years at 6% interest? What is the present value of $1,000,000 to
be received in 40 years at 5% interest?
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What is an Annuity? Sums of money paid or received in periodic
payments for a specific time If you want to receive $100 per year for 5 years,
how much money would you need to invest at 8% interest?
Table Page 8-6 $399.27 If you want payments of $600 per year for 25
years how much would you need to invest at 8% interest?
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Investment Analysis
You are given $1,000 to invest for college when you are a freshman in H.S.
How much would you have if you put it in a savings account at 9% interest?
If you buy 4 sows, profit = $200 per year and sell the sows after 4 years for $150 each
Which is the best option?
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Investment Analysis
Savings = $1,410 Hog Project =
year 1 = 200 x 1.41 = $282
year 2 = 200 x 1.30 = $260
year 3 = 200 x 1.19 = $238
year 4 = 200 x 1.09 = $218
Total = $998 + 600 = $1598
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Opportunity Cost How do you choose the interest rate
compounding and discounting? If you must borrow money, the rate of
interest for borrowing is your opportunity cost
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Index of Profitability
Will an investment return your invested dollars in the time you want it to?
The length of time is up to you If so, invest. If not, don’t invest
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Index of Profitability
You can invest $1,000 in investment A or B
Year “A” Cash Flow “B” Cash Flow
1 500 100
2 400 200
3 300 300
4 200 400
5 100 500
6 600
You would like to return investment in 4 yrs.
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Index of Profitability
Do Options A and B return the original investment?
Do they return the investment within 4 years?
Which does so quicker? Which should you do?
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What is Amortization?
Used to determine the annual payment of a loan
Page 8-14 What would be the annual payment of a
$43,000 loan borrowed at 9% interest to be repaid over 10 years?
What is the total amount of money repaid?
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