Investment Analysis Chapter #8

Time Value of Money u How does time affect money? u Does money increase or decrease over time?

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

What is Compounding? u Extended period of time u Interest paid on principal and on interest u Also used to determine the value of today’s money in the future u If you invest now, what will you have at a later time?

What is Discounting? u The opposite of compounding u Tells you the present value of a future amount of money u If you want a certain amount of money in the future, how much do you need to invest today

Future Value of Money u FV = (1+interest) raised to n u where n = years u Ex: what is the Value of $100 in 10 years at 10% interest? u FV = (1 +.10)10 u FV =

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

Present Value of Money u PV = 1/(1+ interest) raised to n u where n = years u What is the present value of $1 to be received in 10 years at 10% interest? u PV = 1/(1+.10)10 u PV = $0.3855

Discounting Tables u Table on Page 8-5 u What is the present value of $10,000 to be received in 10 years at 4% interest? u What is the present value of $600 to be received in 4 years at 6% interest? u What is the present value of $1,000,000 to be received in 40 years at 5% interest?

What is an Annuity? u Sums of money paid or received in periodic payments for a specific time u If you want to receive $100 per year for 5 years, how much money would you need to invest at 8% interest? u Table Page 8-6 u $ u If you want payments of $600 per year for 25 years how much would you need to invest at 8% interest?

Investment Analysis u You are given $1,000 to invest for college when you are a freshman in H.S. u How much would you have if you put it in a savings account at 9% interest? u If you buy 4 sows, profit = $200 per year and sell the sows after 4 years for $150 each u Which is the best option?

Investment Analysis u Savings = $1,410 u 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 = $ = $1598

Opportunity Cost u How do you choose the interest rate compounding and discounting? u If you must borrow money, the rate of interest for borrowing is your opportunity cost

Index of Profitability u Will an investment return your invested dollars in the time you want it to? u The length of time is up to you u 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 You would like to return investment in 4 yrs.

Index of Profitability u Do Options A and B return the original investment? u Do they return the investment within 4 years? u Which does so quicker? u Which should you do?

What is Amortization? u Used to determine the annual payment of a loan u Page 8-14 u What would be the annual payment of a $43,000 loan borrowed at 9% interest to be repaid over 10 years? u What is the total amount of money repaid?