in financial investment,good decision is required.the work of great analysts Have done well to rebuild my mind in the interesting parts of finance
CALCULATING FUTURE AND PRESENT VALUES OF AN INVESTMENT
Money can be invested to earn interest. So, if you are offered the choice between $100
today and $100 next year, you naturally take the money now to get a year’s interest. Finan-
cial managers make the same point when they say that money has a time value or when they
quote the most basic principle of finance: a dollar today is worth more than a dollar tomorrow.
Suppose you invest $100 in a bank account that pays interest of r =
7% a year. In the
first year you will earn interest of .07 =$100 +
$7 and the value of your investment will
grow to $107:
Value of investment after 1 year =$107
By investing, you give up the opportunity to spend $100 today and you gain the chance to
spend $107 next year.
If you leave your money in the bank for a second year, you earn interest of by raising the interest factor by 2,its the theory of compounding .
The value from interest factor would amount to
$7.49 and your investment will grow to $114.49:
Value of investment after 2 years Would be $107+7.49 =114.49 this is because the interest factor yield a value of $7.49 after compounding for 2years .
How do you decide whether an investment opportunity is worth undertaking? Suppose
you own a small company that is contemplating construction of an office block. The total
cost of buying the land and constructing the building is $370,000, but your real estate
adviser forecasts a shortage of office space a year from now and predicts that you will be
able sell the building for $420,000. For simplicity, we will assume that this $420,000 is a
You should go ahead with the project if the present value (PV) of the cash inflows is
greater than the $370,000 investment. Suppose that the rate of interest on U.S. government
securities is r =
5% per year. Then, the present value of your office building is:
PV =420000/1.05 =$400000
the theory of time value of money is a viable tool in determining the value of an investment .