PPT On Economic Management

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Economic Management Presentation Transcript:
1.Time Value of Money

2.Principles of Economics
Time Value of Money
Investigating Alternatives
Marginal Revenue Vs Marginal Cost
Estimating Risk

3.Time Value of  Money
Interest: The Cost of Money
Economic Equivalence
Development of Interest Formulas
Unconventional Equivalence Calculations

4.Time Value
Money has a time value because it can earn more money over time (earning power).
Time value of money is measured in terms of interest rate.
Interest is the cost of money—a cost to the borrower and an earning to the lender

5.Abbreviations
P = principal (or present worth): a sum of money chosen for purposes of analysis at time zero
i = interest rate per interest period
N = number of total interest periods
F = future worth: a future sum of money at the end of the analysis period
An = a discrete payment or receipt occurring at the end of some interest period n
A = an end-of-period payment or receipt in a uniform series that continues for N periods

6.Compound Interest
At the end of the first period: P(1+i)
At the end of the second period:
P(1+i) + i(P(1+i)) = P(1+i)(1+i) = P(1+i)2
At the end of the third period: P(1+i)3
…....
At the end of the Nth period: P(1+i)N=F

7.If you deposit P dollars today for N periods at i, you will have F dollars at the end of period N.
F dollars at the end of period N is equal to a single sum P dollars now, if your earning power is measured in terms of interest rate i.

8.Economic Equivalence
Interest rate is 10%

9.(F/P, i, N)  … ration of Future value with Present
(P/F,I,N) … ration of Present value with Future

Next Develop
(F/A, i, N) … ration of Future value with Payment
(A/F,I,N) … ration of Payment with Future Value

10.(F/A,i,N) … ration of Future value with Payment
(A/F,I,N) … ration of Payment with Future Value

11.Situation 1:
What value of A would make the two cash flow transactions equivalent if i = 10%?

12.The value of F = A*(F/A, i, N) = 100*(F/A, 10%, 4)
100*(4.6410)=464.10={133.1+121+110+100}

The next step is to Find
P(A/P,10%, 4)
464.10*(0.3155)
=146.42

13.What value of A would make the two cash flow transactions equivalent if i = 10%?

14.Note that the values at 3 are 100*(F/A, 10%, 3)
=331 and 100*(1+i)^3 =133.1+331=464.1
Note that this is the same as
133.1+121+110+100
=464.1 as before
In Year 5 the FV=
=464.1*(1.21)
P2=561.56
=> P2*(A/P,10%, 3)
=>561.56*(0.4021)
A=225.80

15.If the bank agrees to defer the payment of a 100 Dollar loan by one year what will be the annual payment if 4 even payments have to be made at 10% interest?