03 How To Calculate Present Values.pptVIP

Slides by Matthew Will Topics Covered Valuing Long-Lived Assets PV Calculation Short Cuts Compound Interest Nominal and Real Rates of Interest (inflation) Example: Present Values and Bonds Present Values Present Values Present Values Present Values Present Values Present Values Present Values Given two dollars, one received a year from now and the other two years from now, the value of each is commonly called the Discount Factor. Assume r1 = 20% and r2 = 7%. Present Values Given two dollars, one received a year from now and the other two years from now, the value of each is commonly called the Discount Factor. Assume r1 = 20% and r2 = 7%. Present Values Present Values Short Cuts Sometimes there are shortcuts that make it very easy to calculate the present value of an asset that pays off in different periods. These tolls allow us to cut through the calculations quickly. Short Cuts Perpetuity - Financial concept in which a cash flow is theoretically received forever. Short Cuts Perpetuity - Financial concept in which a cash flow is theoretically received forever. Short Cuts Annuity - An asset that pays a fixed sum each year for a specified number of years. Short Cuts Annuity - An asset that pays a fixed sum each year for a specified number of years. Annuity Short Cut Annuity Short Cut Compound Interest Compound Interest Compound Interest Compound Interest Compound Interest Inflation Inflation - Rate at which prices as a whole are increasing. Nominal Interest Rate - Rate at which money invested grows. Real Interest Rate - Rate at which the purchasing power of an investment increases. Inflation Inflation Example If the interest rate on one year govt. bonds is 5.9% and the inflation rate is 3.3%, what is the real interest rate? Valuing a Bond Valuing a Bond Bond Prices and Yields 3- * McGraw Hill/Irwin Copyright ? 2003 by The McGraw-Hill Companies, Inc. All rights reserved How To Calculate Present Values Principles of Corporate Finance Seventh Edition Richard A