FIN 3310 Lecture 3: Lecture 3
Document Summary
Ex: fifo vs. lifo: different fiscal years. Time value of money: the fact that a dollar in hand today is worth more than a dollar promised at some time in the future. If you invest for one period at an interest rate of r, your investment will grow to (1+r) per dollar invested. Process of leaving your money and any accumulated interest in an investment for more than one period. The amount of the compound interest keeps increasing because more and more interest builds up and there is thus more to compound. Present value: earlier money on a time line. Is thus just the reverse of future value. Instead of compounding the money forward into the future, we discount it back to the present: as the length of time until payment grows, present values decline. Future value: later money on a time line, depend critically on the assumed interest rate, particularly for long-lived investments.
