Finance 301 Week 3 Notes
Finance 301 Week 3 Notes Fin 301
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This 2 page Class Notes was uploaded by Catherine Minter on Wednesday September 14, 2016. The Class Notes belongs to Fin 301 at University of Illinois at Chicago taught by Stanley Waite in Fall 2016. Since its upload, it has received 7 views. For similar materials see Managerial Finance in Finance at University of Illinois at Chicago.
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Date Created: 09/14/16
FIN 300: Managerial Finance Week 3 Notes Chapter 3 Interest Rate: converting cash across time - Interest rate: the rate at which money can be borrowed or lent over a given amount of time - Interest rate factor: rate of exchange between dollars today and dollars in the future - Value of $100,000 in one year with 10% interest rate= $110,000. - How much would we need to have in the bank today so that we would end up with $105,000 in the bank in one year? o Ending value/interest rate o 105,000/1.10= $95,454.55 invested today o Compound factor: interest rate (multiply) - Money in the future is worth less today so its price reflects a discount o Discount Rate: The appropriate rate to discount a cash flow to determine its value at an earlier time o Discount Factor: The value today of a dollar received in the future, expressed as: Timelines: - Distinguishing cash inflows from outflows - Can be changed from years to months - Put $10,000 in now, receive one payment of $6,000 in 1 year and another payment of $6,000 in 2 years Valuing Cash Flows at Different Points in Time - Rule 1: It is only possible to compare or combine values at the same point in time - Rule 2: To calculate a cash flow’s future value, you must compound it o The effect on earning “interest on interest” Letting Interest Build: Removing Interest after each year: Difference: Year 1 = $1,000 x 1.1= $1,100 Year 1= $1,000 x 1.1= $1,100 $0 Year 2= $1,100 x 1.1= $1,210 Year 2= $1,000 x 1.1= $1,200 $10 Year 3= $1,210 x 1.1= $1,331 Year 3= $1,000 x 1.1= $1,300 $31 Year 4= $1,331 x 1.1= $1,464 Year 4= $1,000 x 1.1= $1,400 $64 - Rule 3: To calculate the value of a future cash flow at an earlier point in time, we must discount it.
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