This is a summary of the finance part of the SIM2 theory exam which is taught in the second year of the international business studies at Hanze University. It covers chapters 5,10, and 11 from the book "principles of managerial finance" by Chad J. Zutter and Scott B. Smart.
, TIME VALUE OF MONEY
THE ROLE OF TIME VALUE IN FIANNCE
- Time value of money: better to receive money sooner than later because you can
invest money that you have on handy today to earn a positive return (thus producing
more money tomorrow)
- Time-value-of-money analysis: compare cash today vs cash in the future; either:
- Future Value (compounding)
- Present Value (discounting) usually used by managers
- Computational tools:
- Financial calculators
- Electronic spreadsheets
- Cash flow signs
- Basic patterns of cash flow:
- Single amount; lump sum
- Annuity: stream of equal periodic cash flows
- Mixed stream: stream of unequal periodic cash flows
SINGLE AMOUNTS
Future Value: value on some future date of money that you invest today
- Compound Interest: interest that is earned on a given deposit and has become part
of the principal at the end of a specific period
- Principal: either original amount of money placed into and investment or the
balance on which an investment pays interest
- Compounding: process of adding interest to an investment’s principal and paying
interest on the new, higher balance
- FVn = PV0 x (1 + r)n
where:
FVn = Future value after n periods
PV0 = initial principal, or present value when time = 0
r = annual rate of interest (or opportunity cost)
n = number of periods that the money remains invested
- Simple Interest: interest that is earned only on an investment’s original principal
and not on interest that accumulates over time
Present Value: value in todays’ dollars of some future cash flow
- Discounting Cash Flows: process of finding present values; the inverse of
compounding interest
FV n
- PV0 =
(1+r )n
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