上海交通大学：《公司金融学 Corporate Finance》课程教学资源（英文课件）02 Net Present Value and Investment Decision

Chapter 2 Net Present Value and Investment Decision

Chapter 2 Chapter 2 Net Present Value and Net Present Value and Investment Decision Investment Decision

Section 1 Net Present Value

Section 1 Section 1 Net Present Value Net Present Value

Time Value of Money Cash flows occur over a period of time Inflation erodes the value of money over time -What are the value of those cash flows in TODAY'S money slide 2

slide 2 Time Value of Money Time Value of Money ƒ Cash flows occur over a period of time ƒ Inflation erodes the value of money over time ƒ What are the value of those cash flows in TODAY’S money

The time value of money(1) To study the relationship between a dollar today and a (possible uncertain) dollar in the future Future Present value PV= C 1+r slide 3

slide 3 The time value of money (1) The time value of money (1) ƒ To study the relationship between a dollar today and a (possible uncertain) dollar in the future ƒ Future ƒ Present value r C PV + = 1 1

The time value of money (2) Net Present Value NPV=-Cost+PV Future Value and Compounding Simple interest:FV C *(1 +T *r) Compound interest:FV=C (1+r) slide 4

slide 4 The time value of money (2) The time value of money (2) ƒ Net Present Value ƒ Future Value and Compounding Simple interest: FV = C * (1 + T *r) Compound interest: FV = C * (1+r) T NPV = − + PVCost

Example Julie wants to know how large her $10,000 deposit will become at a compound interest rate of for 5 years. 1 2 3 4 5 |10% $10,000 FV5 slide 5

slide 5 Julie wants to know how large her $10,000 $10,000 deposit will become at a compound interest rate of for 5 years. 5 years Example Example 0 1 2 3 4 5 $10,000 $10,000 FV 5 10%

Solution Calculation based on general formula: FVn Po(1+i)n FV5=$10,000(1+0.10)5 =$16,105.10 slide 6

slide 6 Solution Solution Calculation based on general formula: FVn = P0 (1+i)n FV5 = $10,000 (1+ 0.10)5 = $16,105.10 $16,105.10

Problem Julie wants to know how large a deposit to make so that the money will grow to $10,000 in 5 years at a discount rate of 10%. 1 2 3 4 5 10% $10,000 slide 7

slide 7 Problem Problem Julie wants to know how large a deposit to make so that the money will grow to $10,000 $10,000 in 5 years at a discount rate of years 10%. 0 1 2 3 4 5 $10,000 $10,000 PV0 10%

Solution Calculation based on general formula: PVo FVn/(1+i)n PV0=$10,000/(1+0.10)5 =$6,209.21 slide 8

slide 8 Solution Solution Calculation based on general formula: PV0 = FVn / (1+i)n PV0 = $10,000 / (1+ 0.10) $10,000 5 = $6,209.21 $6,209.21

The Power of Compounding The US stock market returned as a whole from 1926 through 1996 (annual rate of return is 10.71%) Simple interest: $1*(1+71*10.71%)=$7.6 Compound interest: $1*(1+10.71%)71=$1371.71 slide 9

slide 9 The Power of Compounding The Power of Compounding The US stock market returned as a whole from 1926 through 1996 (annual rate of return is 10.71%) Simple interest: $1* ( 1+71*10.71%)=$7.6 Compound interest: $1* (1+10.71%)71=$1371.71