School

Florida State UniversityDepartment

Risk Management/Insurance, Real Estate and Legal StudiesCourse Code

REE-3043Professor

William M WoodyardChapter

14This

**preview**shows half of the first page. to view the full**2 pages of the document.**- Introduction

o The valuation of future benefits is complicated by 2 factors:

▪ 1. Even if their timing and magnitude can be known with certainty, the

future benefits of a proposed investment cannot simply be added up to

determine their current value to investors because the present value of

future benefits declines as the time the investor must wait for the future

benefits increases

▪ 2. Value assessments are generally based on expected cash flows, but

what actually happens is seldom, if ever, exactly what the investor

expected

• The more risk investors face when undertaking an investment, the

greater the rate of return they should expect

- The Time Value of Money

o Terminology

▪ Future Value (FV)- the value of money is some period beyond time zero

• Calculating a future value means converting cash invested in the

current period into what it will be worth at some future date

▪ Present Value (PV)- the value of future cash flows at time zero

• Taking the present value of inflows means converting future cash

flows in present value

▪ Lump Sum- a one-time receipt or expenditure occurring in a given period

▪ Ordinary Annuity (A)- a fixed amount of money paid or received at the

end of every period

▪ Compounding- calculation of future values

▪ Discounting- calculation of present values

o Equations, Calculators, and Spreadsheets

▪ N- the number of compounding periods

▪ I- the periodic interest rate

▪ PV- the lump sum amount invested at time zero

▪ PMT- the periodic level payment or receipt

• This may be a fixed monthly mortgage payment or a lease

payment

▪ FV- the lump sum cash flow or the future value of an investment

o The rate of return is usually referred to as the investment yield or the internal

rate of return (IRR)

o The alulated IRR a e opaed to the ivesto’s euied IRR o siila

projects of equivalent risk

▪ If the going-i IRR exeeds the ivesto’s euied ate of etu, the

investment should be undertaken

▪ If the going-i IRR is less tha the ivesto’s euied ate of etu, the

investment should be forgone and other opportunities pursued

o Value and Risk

▪ Many investors believe that high quality industrial property tend to have

relatively reliable cash flows

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