Chapter 3 Time Value of Money



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Chapter 3

After studying Chapter 3, you should be able to:

  • Understand what is meant by "the time value of money."
  • Understand the relationship between present and future value.
  • Describe how the interest rate can be used to adjust the value of cash flows – both forward and backward – to a single point in time.
  • Calculate both the future and present value of: (a) an amount invested today; (b) a stream of equal cash flows (an annuity); and (c) a stream of mixed cash flows.
  • Distinguish between an “ordinary annuity” and an “annuity due.”
  • Use interest factor tables and understand how they provide a shortcut to calculating present and future values.
  • Use interest factor tables to find an unknown interest rate or growth rate when the number of time periods and future and present values are known.
  • Build an “amortization schedule” for an installment-style loan.

The Time Value of Money

The Interest Rate

  • Which would you prefer – $10,000 today or $10,000 in 5 years?

Why TIME?

  • TIME allows you the opportunity to postpone consumption and earn INTEREST.
  • Why is TIME such an important element in your decision?

Types of Interest


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