InvestmentAnalysis

Chapter #8

Time Value of Money

How does time affect money? Does money increase or decrease over

time?

Borrowing Money What is interest? Money paid as the cost of borrowing What is principal? The money that is borrowed

What is Compounding? Extended period of time Interest paid on principal and on interest Also used to determine the value of

today’s money in the future If you invest now, what will you have at

a later time?

What is Discounting?

The opposite of compounding Tells you the present value of a future

amount of money If you want a certain amount of money

in the future, how much do you need to invest today

Future Value of Money

FV = (1+interest) raised to n where n = years Ex: what is the Value of $100 in 10

years at 10% interest? FV = (1 + .10)10 FV = 259.37

Compounding Tables Page 8-4 What is the Future Value of: $250 invested at 8% over 19 years $15,000 invested at 4% over 25 years $1800 invested at 6% over 12 years $2800 invested at 5% over 5 years

Present Value of Money

PV = 1/(1+ interest) raised to n where n = years What is the present value of $1 to be

received in 10 years at 10% interest? PV = 1/(1+.10)10 PV = $0.3855

Discounting Tables Table on Page 8-5 What is the present value of $10,000 to be

received in 10 years at 4% interest? What is the present value of $600 to be

received in 4 years at 6% interest? What is the present value of $1,000,000 to

be received in 40 years at 5% interest?

What is an Annuity? Sums of money paid or received in periodic

payments for a specific time If you want to receive $100 per year for 5 years,

how much money would you need to invest at 8% interest?

Table Page 8-6 $399.27 If you want payments of $600 per year for 25

years how much would you need to invest at 8% interest?

Investment Analysis

You are given $1,000 to invest for college when you are a freshman in H.S.

How much would you have if you put it in a savings account at 9% interest?

If you buy 4 sows, profit = $200 per year and sell the sows after 4 years for $150 each

Which is the best option?

Investment Analysis

Savings = $1,410 Hog Project =

year 1 = 200 x 1.41 = $282

year 2 = 200 x 1.30 = $260

year 3 = 200 x 1.19 = $238

year 4 = 200 x 1.09 = $218

Total = $998 + 600 = $1598

Opportunity Cost How do you choose the interest rate

compounding and discounting? If you must borrow money, the rate of

interest for borrowing is your opportunity cost

Index of Profitability

Will an investment return your invested dollars in the time you want it to?

The length of time is up to you If so, invest. If not, don’t invest

Index of Profitability

You can invest $1,000 in investment A or B

Year “A” Cash Flow “B” Cash Flow

1 500 100

2 400 200

3 300 300

4 200 400

5 100 500

6 600

You would like to return investment in 4 yrs.

Index of Profitability

Do Options A and B return the original investment?

Do they return the investment within 4 years?

Which does so quicker? Which should you do?

What is Amortization?

Used to determine the annual payment of a loan

Page 8-14 What would be the annual payment of a

$43,000 loan borrowed at 9% interest to be repaid over 10 years?

What is the total amount of money repaid?