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8/8/2019 Tvm Power Point
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THE TIME VALUE OF
MONEY
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Refers to the appreciation and
depreciation of the value of a
capital asset over time
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Appreciation is the increase in value of a
property overtime due to inflation,
supply and demand, capitalimprovements and others.
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Depreciation refers to a physical
assets loss of value over time.
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Methods for Determining the depreciation
of an Asset:
Straight-line depreciation- assumes that the
asset will lose an equal amount of value each
year.
To calculate: purchase price
salvage value
estimated useful life
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For example, a washing machine that is
bought for $750 and expected to be worth
$210 after 15 years of use will depreciate $36
annually.
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Unit depreciation -this method
involves how much the asset is
used over a period of time
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For example, as the owner of a parcel delivery
company, you decide to purchase a delivery truckon 1/1/2005 for $50,000. After some calculationsbased on maintenance and repair factors youdetermine that for every mile the truck is driven itwill cost 10 cents in maintenance and repair. By12/31/2005 the truck has been driven 20,000 miles.To calculate the truck's depreciation that year,multiply 10 cents/mile by 20,000 miles. After oneyear, the truck that you bought for $50,000 hasdepreciated by $2,000. The next year you drive thetruck only 10,000 miles so it depreciates only$1,000 that year.
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Devaluation refers to a decline in the
value of a currency in relation to
another, usually brought about bythe actions of a central bank or
monetary authority.
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Market-driven devaluation, by contrast,is often the formal recognition by a
government, frequently during a
monetary crisis, that the value of itscurrency relative to major world
currencies has already depreciated
through trading in the foreign exchange
markets.
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Basic terminology:
Terminal value/ future value- how much what
you got now grows to when compounded at a
given rate
In determining the future value, we measure
the value of an amount that is allowed to
grow at a given interest rate over a period of
time
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Five factors to a TVM Calculation:
1. Number of time periods involved
2. Annual interest rate
3. Present value4. Payments
5. Future value
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Assume an investor has $1000 and wishes toknow its worth after 4 years if it grows at 10%
per year.
1st year $1000x 1.10=$1,100
2nd $1100x 1.10=$1,210
3rd $1210x 1.10=$1,331
4th
$1331x 1.10=$1,464
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FV= PV (1 + i )N
Where:
FV = Future Value
PV = Present Value
i = the interest rate per period
n= the number of compounding periods
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FV= PV (1 + i )N
=$1,000 ( 1+.10) 4
=$1,000(1.464)=$1,464
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Determine Future Value Compounded AnnuallyWhat is the future value of $34 in 5 years if the interest
rate is 5%? (i=.05)
FV= PV ( 1 + i ) N
FV= $ 34 ( 1+ .05 ) 5FV= $ 34 (1.2762815)
FV= $43.39
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Determine Future Value Compounded MonthlyWhat is the future value of $34 in 5 years if the interest rate is
5%? (i equals .05 divided by 12, because there are 12 months peryear. So 0.05/12=.004166, so i=.004166)
FV= PV ( 1 + i ) N
FV= $ 34 ( 1+ .004166 )60
FV= $ 34 (1.283307)
FV= $43.63
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Present Value - a sum payable in the future is
worth less today than the stated amount
It is the exact opposite of the future value.
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For example, we determined that the future
value of $1,000 for 4 periods at 10% was
$1,464. We could reverse the process to state
that $1,464 received 4 years into the future,
with 10% interest is worth only $1,000 today-
its present value.
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PV= FV[ ]
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Determine Present Value Compounded AnnuallyI will give you $1000 in 5 years. How much money should you
give me now to make it fair to me. You think a good interest ratewould be 6% . (i=.06)
PV= FV[ ]
=$1000[ ]
=$747.38
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Determine Present Value Compounded
Monthly
(i equals .06 divided by 12, because there are 12 months peryear so 0.06/12=.005 so i=.005)
PV= FV[ ]
=$1000 [ ]
=$741.37
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