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COPYRIGHT?ZHULI Chapter 4 The time value of money Objectives Calculate the future value to which money invested at a given interest rate will grow Calculate the present value of a future payment Calculate present and future values of a series of cash payments Find the interest rate implied by present and future values Understand the difference between real and nominal cash flows and between real and nominal interest rates. Compare interest rates quoted over different time intervals—for example, monthly versus annual rates. Content Future values and compound interest Present values Multiple cash flows Level cash flows: perpetuities and annuities Inflation and the time value of money Effective annual interest rates Content Future values and compound interest Present values Multiple cash flows Level cash flows: perpetuities and annuities Inflation and the time value of money Effective annual interest rates Present value PV: value today of a future cash flow To calculate present value, we discounted the future value at the interest rate r. The calculation is therefore termed a discounted cash flow DCF calculation, an the interest rate r is known as the discounted rate Content Future values and compound interest Present values Multiple cash flows Level cash flows: perpetuities and annuities Inflation and the time value of money Effective annual interest rates Future value of multiple cash flows Present value of multiple cash flows Content Future values and compound interest Present values Multiple cash flows Level cash flows: perpetuities and annuities Inflation and the time value of money Effective annual interest rates Annuity: equally spaced level stream of cash flows, with a finite maturity Perpetuity: stream of level cash payments that never ends Annuity due: level stream of cash flows starting immediately How to value perpetuities Two warnings about the formula Do not confuse the formula with the present value of a single cash payment 1/1+r