25300 Lecture 3: 25300, lecture 3
Document Summary
The financial manager makes decisions about proposals with cash flows over long periods of time. An important consideration is the timing of these cash flows. The time value of money must be recognised. A dollar amount today - present value. Gives a dollar amount in the future - future value. Takes no account of change in principle. Used in valuation of short term financial instruments traded in the money market. Int = interest amount over the time period. Pv = fv / (1 + i x n) rearranging above question. Interest is added to the principle each period. Whereas, simple interest is calculated only on the original amount. The compounding time can be any designated length of time. Formula = fv = pv (1 + i) n. Pv = fv/ (1 + i) n. Interest rates are typically quoted as per annum. However, the compounding frequency is not always annual.
