Professional Documents
Culture Documents
Presentations for
Finance for
Non-Financial Managers:
Seventh Edition
Prepared by
Pierre Bergeron
University of Ottawa
101
CHAPTER 10
Time-Value-of-Money
Concept
102
Learning Objectives
1. Define time value of money, inflation, and
risk.
2. Explain the financial tools used to solve
time-value-of-money problems.
3. Differentiate between future values of single
sums and future values of annuities.
4. Distinguish between present values of single
sums and present values of annuities.
5. Make capital investment decisions by using
time-value-of-money tools.
103
LO 1
existence of interest
$1,100
$1,100
104
Table A (2.594)
$813.72
Annuity
IRR
$ 12,970
$ 12,970
0
Table C (15.937)
Discounting
-$5,000 Single sum
+$5,000 PV
0 NPV
Copyright 2014 Nelson Education Ltd.
LO 1
20%
10 years @ 30%
Table D (4.1925)
(3.0915)
Table
D (6.1446)
1,617.33
$ 1,192.60
$813.72
Annuity
105
IRR
LO 1
20
57.275
Money is worth 10% ($1,000 ___________)
Death benefit (cash outflow)
Net cash flow of NFV
$ - 50,000
7,275
$________
_____________companies
Industrial
Years 1
20
106
12%
IRR is 11.9%
LO 1
107
$100
80
20
10
10
5
5
2
$ 7
$110
85
25
12
13
6
7
2
$ 9
$120
90
30
14
16
8
8
2
$ 10
LO 1
Factors to consider
1. Time value of money
2. Inflation
3. Risk
Types of projects:
High risk, medium risk, low risk, compulsory
LR/C
____
LR
____
____
MR
Modernization
Expansion
New facility
New
equipment/machinery/vehicle
HR New product
____
Anti-pollution equipment
C
____
HR/C
____ Research and development
____
LR
108
TIME
CASH
$10,000
$12,000
$14,000
$16,000
$10,000
$12,000
$14,000
$16,000
$10,000
$12,000
$14,000
$16,000
$10,000
$12,000
$14,000
$16,000
$10,000
$12,000
$14,000
$16,000
$10,000
$12,000
$14,000
$16,000
109
$10,000
$12,000
$14,000
$16,000
$10,000
$12,000
$14,000
$16,000
$10,000
$12,000
$14,000
$16,000
LO 1
Algebraic Notations
Interest Tables
Financial Calculators and
Spreadsheets
Time Lines
1010
LO 2
LO 3
Effect of Compounding
Problem:
Year
Beginning
amount
Interest
rate
Amount of
interest
Beginning
amount
Ending
amount
$1,000
.10
$100
$1,000
$1,100
$1,100
.10
$110
$1,100
$1,210
$1,210
.10
$121
$1,210
$1,331
F = P (1 + i)n
F = Future amount
F = $1,000 (1.10)3
F = $1,000 X 1.331
i = Interest rate
F = $1,331
n = Number of years
1011
LO 3
1.090
1.188
1.295
1.412
1.539
1.677
1.828
1.993
2.172
2.367
2.580
2.813
3.066
3.342
3.642
3.970
4.328
4.717
5.142
5.604
6.109
6.659
7.258
7.911
8.623
1.100
1.210
1.331
1.464
1.611
1.772
1.949
2.144
2.358
2.594
2.853
3.138
3.452
3.798
4.177
4.595
5.054
5.560
6.116
6.728
7.400
8.140
8.954
9.850
10.835
1.110
1.232
1.368
1.518
1.685
1.870
2.076
2.305
2.558
2.839
3.152
3.498
3.883
4.310
4.785
5.311
5.895
6.544
7.263
8.062
8.949
9.934
11.026
12.239
13.586
12%
14%
16%
18%
20%
1.120
1.254
1.405
1.574
1.762
1.974
2.211
2.476
2.773
3.106
3.479
3.896
4.363
4.887
5.474
5.130
6.866
7.690
8.613
9.646
10.804
12.100
13.552
15.179
17.000
1.140
1.300
1.482
1.689
1.925
2.195
2.502
2.853
3.252
3.707
4.226
4.818
5.492
6.261
7.138
8.137
9.276
10.575
12.056
13.744
15.668
17.861
20.362
23.212
26.462
1.160
1.346
1.561
1.811
2.100
2.436
2.826
3.278
3.803
4.411
5.117
5.936
6.886
7.988
9.266
10.748
12.468
14.463
16.777
19.461
22.575
26.186
30.376
35.236
40.874
1.180
1.392
1.643
1.939
2.288
2.700
3.185
3.759
4.435
5.234
6.176
7.288
8.599
10.147
11.974
14.129
16.672
19.673
23.214
27.393
32.324
38.142
45.008
53.109
62.669
1.200
1.440
1.728
2.074
2.488
2.986
3.583
4.300
5.160
6.192
7.430
8.916
10.699
12.839
15.407
18.488
22.186
26.623
31.948
38.338
46.005
55.206
66.247
79.497
95.396
1012
LO 3
Amount
Interest
received
factors
$1,000
1.464
$1,000
1.331
$1,000
1.210
$1,000
1.100
$1,000
1.000
$5,000
$1,105
W=R
Future
Interest
$464
$331
$210
$100
---$6,105
value
$1,464
$1,331
$1,210
$1,100
$1,000
(1 + i)n - 1
W = Value of annuity
R = Sum of receipts
W = $1,000 X 6.105
i = Interest rate
F = $6,105
n = Number of years
1013
LO 3
1.000
2.090
3.278
4.573
5.985
7.523
9.200
11.029
13.021
15.193
17.560
20.141
22.953
26.019
29.361
33.003
36.974
41.301
46.019
51.160
56.765
62.873
69.532
76.790
84.701
1.000
2.100
3.310
4.641
6.105
7.716
9.487
11.436
13.580
15.937
18.531
21.384
24.523
27.975
31.773
35.950
40.545
45.599
51.159
57.275
64.003
71.403
79.543
88.497
98.347
1.000
2.110
3.342
4.710
6.228
7.913
9.783
11.859
14.164
16.722
19.561
22.713
26.212
30.095
34.405
39.190
44.501
50.396
56.940
64.203
72.265
81.214
91.148
102.174
114.413
12%
14%
16%
18%
20%
1.000
2.120
3.374
4.779
6.353
8.115
10.089
12.300
14.776
17.549
20.655
24.133
28.029
32.393
37.280
42.753
48.884
55.750
63.440
72.052
81.699
92.503
104.603
118.155
133.334
1.000
2.140
3.440
4.921
6.610
8.536
10.731
13.233
16.085
19.337
23.045
27.271
32.089
37.581
43.842
50.980
59.118
68.394
78.969
91.025
104.768
120.436
138.297
158.659
181.871
1.000
2.160
3.506
5.066
6.877
8.977
11.414
14.240
17.519
21.322
25.733
30.850
36.786
43.672
51.660
60.925
71.673
84.141
98.603
115.380
134.840
157.415
183.601
213.977
249.214
1.000
2.180
3.572
5.215
7.154
9.442
12.142
15.327
19.086
23.521
28.755
34.931
42.219
50.818
60.965
72.939
87.068
103.740
123.413
146.628
174.021
206.345
244.487
289.494
342.603
1.000
2.200
3.640
5.368
7.442
9.930
12.916
16.499
20.799
25.959
32.150
39.581
48.497
59.196
72.035
87.442
105.931
128.117
154.740
186.688
225.026
271.031
326.237
392.404
471.981
1014
LO 4
Effect of Discounting
Problem:
Beginning
amount
Discount
rate
Present
value
$1,000
0.75131
$751.3
P=F
(1 + i)n
P = $1,000
(1 + .10)3
F = $1,000
1
1.331
P = $1,000 x .75131
P = Present value
F = Sum to be received
i = Interest rate
n = Number of years
P = $751.31
Copyright 2014 Nelson Education Ltd.
1015
LO 4
0.91743
.84168
.77218
.70843
.64993
.59627
.54703
.50187
.46043
.42241
.38753
.35553
.32618
.29925
.27454
.25187
.23107
.21199
.19449
.17843
.16370
.15018
.13778
.12640
.11597
0.90909
.82645
.75131
.68301
.62092
.56447
.51316
.46651
.42410
.38554
.35049
.31863
.28966
.26333
.23939
.21763
.19784
.17986
.16351
.14864
.13513
.12285
.11168
.10153
.09230
0.90090
.81162
.73119
.65873
.59345
.53464
.48166
.43393
.39092
.35218
.31728
.28584
.25751
.23199
.20900
.18829
.16963
.15202
.13768
.12403
.11174
.10067
.09069
.08170
.07361
12%
0.89286
.7971
.71178
.63552
.56743
.50663
.45235
.40388
.36061
.32197
.28748
.25667
.22917
.20462
.18270
.16312
.14564
.13004
.11611
.10367
.09256
.08264
.07379
.06588
.05882
13%14%
0.88496
.78315
.69305
.61332
.54276
.48032
.42506
.37616
.33288
.29459
.26070
.23071
.20416
.18068
.15989
.14150
.12522
.11081
.09806
.08678
.07680
.06796
.06014
.05322
.04710
0.87719
.76947
.67497
.59208
.51937
.45559
.39964
.35056
.30751
.26974
.23662
.20756
.18207
.15971
.14010
.12289
.10780
.09456
.08295
.07276
.06383
.05599
.04911
.04308
.03779
1016
15%
16%
0.86957
.75614
.65752
.57175
.49718
.43233
.37594
.32690
.28426
.24718
.21494
.18691
.16253
.14133
.12289
.10686
.09293
.08080
.07026
.06110
.05313
.04620
.04017
.03493
.03038
0.86207
.74316
.64066
.55229
.47611
.41044
.35383
.30503
.26295
.22668
.19542
.16846
.14523
.12520
.10793
.09304
.08021
.06914
.05961
.05139
.04430
.03819
.03292
.02838
.02447
LO 4
Year
1
2
3
4
5
B=
1- (1 + i)-n
i
W = $1,000 X 3.7908
F = $3,790.80
Copyright 2014 Nelson Education Ltd.
Interest
factors
0.9091
0.8264
0.7513
0.6830
0.6209
Present
value
$909
$826
$751
$683
$621
$3,790
LO 4
0.9174
1.7591
2.5313
3.2397
3.8896
4.4859
5.0329
5.5348
5.9852
6.4176
6.8052
7.1607
7.4869
7.7861
8.0607
8.3125
8.5436
8.7556
8.9501
9.1285
9.2922
9.4424
9.5802
9.7066
9.8226
0.9091
1.7355
2.4868
3.1699
3.7908
4.3553
4.8684
5.3349
5.7590
6.1446
6.4951
6.8137
7.1034
7.3667
7.6061
7.8237
8.0215
8.2014
8.3649
8.5136
8.6487
8.7715
8.8832
8.9847
9.0770
0.9009
1.7125
2.4437
3.1024
3.6959
4.2305
4.7122
5.1461
5.5370
5.8892
6.2065
6.4924
6.7499
6.9819
7.1909
7.3792
7.5488
7.7016
7.8393
7.9633
8.0751
8.1757
8.2664
8.3481
8.4217
12%
0.8929
1.6901
2.4018
3.0373
3.6048
4.1114
4.5638
4.9676
5.3282
5.6502
5.9377
6.1944
6.4235
6.6282
6.8109
6.9740
7.1196
7.2497
7.3658
7.4694
7.5620
7.6446
7.7184
7.7843
7.8431
13%
14%
15%
0.8772
1.6467
2.3216
2.9137
3.4331
3.8887
4.2883
4.6389
4.9464
5.2161
5.4527
5.6603
5.8424
6.0021
6.1422
6.2651
6.3729
6.4674
6.5504
6.6231
6.6870
6.7429
6.7921
6.8351
6.8729
0.8696
1.6257
2.2832
2.8550
3.3522
3.7845
4.1604
4.4873
4.7716
5.0188
5.2337
5.4206
5.5831
5.7245
5.8474
5.9542
6.0472
6.1280
6.1982
6.2593
6.3125
6.3587
6.3988
6.4338
6.4641
0.8850
1.6681
2.3612
2.9745
3.5172
3.9976
4.4226
4.7988
5.1317
5.4262
5.6869
5.9176
6.1218
6.3025
6.4624
6.6039
6.7291
6.8399
6.9380
7.0248
7.1016
7.1695
7.2297
7.2829
7.3300
1018
16%
0.8621
1.6052
2.2459
2.7982
3.2743
3.6847
4.0386
4.3436
4.6065
4.8332
5.0286
5.1971
5.3423
5.4675
5.5755
5.6685
5.7487
5.8178
5.8775
5.9288
5.9731
6.0113
6.0442
6.0726
6.0971
1. Investment
-$ 25,000
LO 5
-$ 25,000
1. Investment
2. Annual savings:2,754
+$_______
3. Total savings:68,850
+$_______
4. Present value of savings
(_________
9.0770 X $_______)
1,000
Net present value
(_________
X $_______)
2,754
9.0770
Net present value
9,077
+$______
15,923
-$______
+$______
25,000
$______0
1019
LO 5
But, if you want to make 16% on the $25,000 asset, how much must
your asset generate in savings or cash each year?
1. Investment
- $ 25,000
2. Annual savings:
$ _______
4,100
3. Total savings:
$________
102,500
4. Present value of savings
(________4,100
x $________ )
6.0971
Net present value
1.
2.
3.
Hurdle rate
_____
16 %
1020
$25,000
Loan
$25,000
2,754
4,100
Savings $ ________
Payments $ _________
16
Gives _________%
Per year
10
Costs __________%
Per year
1021
LO 5
LO 5
To compound
To discount
Single sum
Table A
Table B
Annuity
Table C
Table D
1022