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Chapter 05 - Introduction to Valuation: The Time Value of Money
5-1
Chapter 5
INTRODUCTION TO VALUATION: THE TIME VALUE
OF MONEY
CHAPTER WEB SITES
Section
Web Address
www.investopedia.com
CHAPTER ORGANIZATION
5.1 Future Value and Compounding
5.2 Present Value and Discounting
5.3 More about Present and Future Values
5.4 Summary and Conclusions
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ANNOTATED CHAPTER OUTLINE
Lecture Tip: Many students find the phrases “time value of
money” and “a dollar today is worth more than a dollar later” a
bit confusing. In some ways it might be better to say the “money
value of time.”
5.1. Future Value and Compounding
A. Investing for a single period
Chapter 05 - Introduction to Valuation: The Time Value of Money
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Reinvesting the interest, we earn interest on interest, i.e.,
compounding
Lecture Tip: It is important that students understand the impact of
compounding now, or they will have more difficulty distinguishing
when it is appropriate to use the APR and when it is appropriate to
use the effective annual rate.
Real-World Tip: Students are often helped by concrete examples
C. A Note about Compound Growth
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Lecture Tip: You may wish to take this opportunity to remind
students that, since compound growth rates are found using only
above.
5.2. Present Value and Discounting
A. The Single-Period Case
Discounting – the process of finding the present value.
Lecture Tip: It may be helpful to utilize the example of $100
B. Present Values for Multiple Periods
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Lecture Tip: The present value decreases as interest rates
increase. Since there is a reciprocal relationship between PVIFs
5.3. More about Present and Future Values
A. Present versus Future Value
often do so because it is never really clear to them that given a
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B. Determining the Discount Rate
Start with the basic time value of money equation and rearrange to
solve for r:
Lecture Tip: The following example can be used to demonstrate
the effects of compounding over long periods.
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C. Finding the Number of Periods
5.4. Summary and Conclusions
