Department

ManagementCourse Code

MGT338H5Professor

Adam KadarChapter

5This

**preview**shows half of the first page. to view the full**2 pages of the document.**Chapter 5

5.1 – opportunity cost

Time value of money: idea that dollar today is worth more than dollar in the future

Medium of Exchange: something that can be used to facilitate transactions and has no value in and of

itself

Opportunity cost of money: interest rate that would be earned by investing it

Required rate of return or discount rate: market interest rate or investor’s opportunity cost

Simple Interest: interest paid or received on only initial investment (principle)

Value (time n) = P + ( n x P x k) find value of investment at any point

P = principle, n = # of periods, p x k = interest

e.g. person offer choice between 20,000 TODAY and $31,000 in 5 YEARS can calculate 2 annual interest

payments.

Solution: With same 10% interest rate, annual interest is 20,000 x 0.1 = 2000 / year

In 5 years, would generate 10,000 interest , meaning that 20,000 today = 30000 in 5 years

Therefore, correct choice = 31000 in 5 years because is worth more

Compound Interest: interest that is earned on principle amount invested and on future interest payments

can result in dramatic growth in value of investment over time

FV = PV ( 1+ k)n

Compound Value Interest Factor : (1+k)n

Basis Point: 1/100 of 1 percent

Discounting: finding present value of future value by accounting for time value of money

Annuity: regular payments

on an investment that are

for the same amount and are paid

at the same interval

Cash Flows: actual cash

generated from an investment

Lessee: person who leases

an item

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