Class notes

BMAN10522 Financial Decision Making Lecture 3 Notes

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Course
Financial Decision Making (BMAN10522)

Institution
The University Of Manchester (UOM)

This document covers the topic of Time Value Of Money. Specifically, the topics covered are: 1. Compound interest and future values 2. Discounting and present value 3. Valuing multi-period cash flows 4. Annuities Examples and step by step guidance are provided

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Uploaded on March 25, 2024
Number of pages 2
Written in 2023/2024
Type Class notes
Professor(s) Chanaka ganepola
Contains Lecture 3

lecture 3
financial decision making
lecture
bman10522
undergraduate
finance
firstyear
firstyearnotes
notes

Institution
The University of Manchester (UOM)
Education Unknown
Course
Financial Decision Making (BMAN10522)

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Dete Fie i 5 Feb 2024

Learning objectives for this topic

&
① compound interest
a future values

② Discounting a present values covered in this

& valuing multi-period cash flows Lecture

④ special Cash flow Patterns -
Annuities & Perpetuities
& compounding periods & effective annual rates .

⑧ Non-constant interest rates

⑦ Real versus nominal interest rates

COMPOUNDING AND FUTURE VALVES

>
-
Future value is the amount a sum , of money , grows to as , it earns interest over a period .

↳ Eg. Invest [1 , 000 at 12 % per
year
.

↳ Future value 12) E /120
in <1000 X (1 + 8 . :

COMPOUND INTEREST

>
-
each period's interest earns interest in future periods

>
-

Investing at interest rate of per year for t years , future value in

↳ (I+V) x [It8] X Cltr) .... [Itr) : [Itr) -

>
-

Eg :
Future value of 1000 invested at 0 12.
for 6 years
↳ FV = -1000 x (1 .
1276 : E 1973 . 8

>
-
simple interest : only the original Principal (E1000) earns interest

DISCOUNTING AND PRESENT VALUES

in
D: What i the value now of E2 ,
000 5
years , at 11 % per year ?
2000
<1186 90
IT) .
:

:d
.

<
by 3
Notes
Ang
SOLVING FOR R AND T garde .

FU :
PV)( + r)
=

solving for r
solving for t

Q ①
Ev : (1 + = #
PV
= (l + r) +

④
(t)" =
1 + r
InFV-InPV : In(1 +
② r)

" ③ In FV-InPV
③ r
(F)= -
1 + :

en(1 + r)

Examples

① If your investment doubles in 3 years what ir & At r = 30 % how long to double your money ?

:
(2)" -
I
en2-en 1
= 2 . 64 years
= 0 .
1487 en(1 .
3)

= 14 .
87 %

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