Investment Analysis

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InvestmentAnalysis

• Chapter 8

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Time Value of Money

• How does time affect money?
• Does money increase or decrease over time?

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Borrowing Money

• What is interest?
• Money paid as the cost of borrowing
• What is principal?
• The money that is borrowed

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What is Compounding?

• Extended period of time
• Interest paid on principal and on interest
• Also used to determine the value of todays money
  in the future
• If you invest now, what will you have at a later
  time?

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What is Discounting?

• The opposite of compounding
• Tells you the present value of a future amount of
  money
• If you want a certain amount of money in the
  future, how much do you need to invest today

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Future Value of Money

• FV (1interest) raised to n
• where n years
• Ex what is the Value of 100 in 10 years at 10
  interest?
• FV (1 .10)10
• FV 259.37

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Compounding Tables

• Page 8-4
• What is the Future Value of
• 250 invested at 8 over 19 years
• 15,000 invested at 4 over 25 years
• 1800 invested at 6 over 12 years
• 2800 invested at 5 over 5 years

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Present Value of Money

• PV 1/(1 interest) raised to n
• where n years
• What is the present value of 1 to be received in
  10 years at 10 interest?
• PV 1/(1.10)10
• PV 0.3855

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Discounting Tables

• Table on Page 8-5
• What is the present value of 10,000 to be
  received in 10 years at 4 interest?
• What is the present value of 600 to be received
  in 4 years at 6 interest?
• What is the present value of 1,000,000 to be
  received in 40 years at 5 interest?

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What is an Annuity?

• Sums of money paid or received in periodic
  payments for a specific time
• If you want to receive 100 per year for 5 years,
  how much money would you need to invest at 8
  interest?
• Table Page 8-6
• 399.27
• If you want payments of 600 per year for 25
  years how much would you need to invest at 8
  interest?

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Investment Analysis

• You are given 1,000 to invest for college when
  you are a freshman in H.S.
• How much would you have if you put it in a
  savings account at 9 interest?
• If you buy 4 sows, profit 200 per year and
  sell the sows after 4 years for 150 each
• Which is the best option?

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Investment Analysis

• Savings 1,410
• Hog Project
• year 1 200 x 1.41 282
• year 2 200 x 1.30 260
• year 3 200 x 1.19 238
• year 4 200 x 1.09 218
• Total 998 600 1598

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Opportunity Cost

• How do you choose the interest rate compounding
  and discounting?
• If you must borrow money, the rate of interest
  for borrowing is your opportunity cost

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Index of Profitability

• Will an investment return your invested dollars
  in the time you want it to?
• The length of time is up to you
• If so, invest. If not, dont invest

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Index of Profitability

• You can invest 1,000 in investment A or B
• Year A Cash Flow B Cash Flow
• 1 500 100
• 2 400 200
• 3 300 300
• 4 200 400
• 5 100 500
• 6 600
• You would like to return investment in 4 yrs.

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Index of Profitability

• Do Options A and B return the original
  investment?
• Do they return the investment within 4 years?
• Which does so quicker?
• Which should you do?

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What is Amortization?

• Used to determine the annual payment of a loan
• Page 8-14
• What would be the annual payment of a 43,000
  loan borrowed at 9 interest to be repaid over 10
  years?
• What is the total amount of money repaid?

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