Lecture Business finance - Chapter 3: The time value of money: An introduction to financial mathematics

Chapter 3 The Time Value of Money: An Introduction to Financial Mathematics Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 3–1 Prepared by Dr Buly Cardak Learning Objectives • Understand and solve problems involving simple interest and compound interest, including accumulating, discounting and making comparisons using the effective interest rate. • Value, as at any date, contracts involving multiple cash flows. • Distinguish between different types of annuity and calculate their present and future values. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 3–2 Prepared by Dr Buly Cardak Learning Objectives (cont.) • Apply knowledge of annuities to solve a range of problems, including problems involving principal-and-interest loan contracts. • Distinguish between ordinary and general annuities and make basic calculations involving general annuities. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 3–3 Prepared by Dr Buly Cardak Fundamental Concepts • Cash flows — fundamental to finance, the funds that flow between parties either now or in the future as a consequence of a financial contract. • Rate of return — relates cash inflows to cash outflows. r = 1 C0 C0 where: C = cash inflow at time 1 C0= cash inflow at time 0 r = rate of return per period Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 3–4 Prepared by Dr Buly Cardak Fundamental Concepts (cont.) • Interest rate — special case of rate of return (used when the financial agreement is in the form of debt). • Time value of money – Money received now can be invested to earn additional cash (interest). – Relates to opportunity cost of giving up money or resources for a period of time — either forgone investments or consumption, whatever the next best alternative is. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 3–5 Prepared by Dr Buly Cardak ... - tailieumienphi.vn