Financial Management

Financial ManagementTime Value of MoneyBM056-3-2-FMGTCost of CapitalLearning OutcomesAt the end of the lesson, students should be able to understand:What is Time Value of Money?Present Value (PV), Future Value (FV), Interest RateSimple InterestCompound InterestCompounding and Future Value (FV)Discounting and Present Value (PV)GlossarySlide 2 of 58BM056-3-2-FMGTCost of Capital1. What is Time Value of Money?Money has time value - a dollar received today is worth more than a dollar received in the future (even if it is not very far into the future).This will be true where:It is certain that the dollar will be received at the specified time in the future, e.g. 6 December 2014, SaturdayNo inflation to lower the purchasing power of the dollar to be received in the future.Slide 5 of 58BM056-3-2-FMGTCost of CapitalExample 1:Today (Present) Date:6 November 2014, ThursdayFuture Date (1 year from todays date):6 November 2015, FridayAlice lends Betty RM100.Principal Amount = Present Value = RM100Alice is a lender. RM100 is Alices lending amountBetty is a borrower. RM100 is Bettys borrowing amountSlide 5 of 582. Present Value (PV), Future Value (FV), Interest RateBM056-3-2-FMGTCost of CapitalFrom 6 November 2014, Thursdayto 6 November 2015, Friday, Alice (lender):forgoes the use of her money of RM100delays her gratification/need

From 6 November 2014, Thursdayto 6 November 2015, Friday, Betty (borrower):uses/spends Alices money of RM100instantly/immediately fulfills her gratification/needSlide 5 of 582. Present Value (PV), Future Value (FV), Interest Rate (Cont)BM056-3-2-FMGTCost of CapitalOn 6 November 2015, Friday, Betty (borrower) repays Alice (lender)Principal Amount = Present Value = RM100

Interest Amount = RM10(to reward for Alices delayed gratification, Betty pays an Interest Rate of 10% per annum on the borrowing amount of RM100)

Total Repayment Amount= RM100 + RM10= RM110 (Future Value)Slide 5 of 582. Present Value (PV), Future Value (FV), Interest Rate (Cont)BM056-3-2-FMGTCost of CapitalThe Simple Interest amount for 1 year is calculated as:

Annual Interest Rate xthe original Principal AmountRepayment Amount= the original Principal Amount+ Simple Interest

Refer to Tutorial Questions 1, 2 and 3Slide 5 of 583. Simple InterestBM056-3-2-FMGTCost of CapitalThe Compound Interest amount for 1 year is paid/calculated as

Annual Interest Rate xthe previous Accumulated Amount

Repayment Amount= the previous Accumulated Amount+ Compound Interest

Refer to Tutorial Questions 4, 5 and 6Slide 5 of 584. Compound InterestBM056-3-2-FMGTCost of CapitalUsing Tutorial Questions 4 , 5 and 6 on Compound Interest

Given:Present Value at Year 0 (PV0) = RM100Future Value at Year 1 (FV1) = RM110Future Value at Year 2 (FV2) = RM121Future Value at Year 3 (FV3) = RM133.10Interest Rate (i)= 10% per annumSlide 5 of 585. Compounding and Future Value (FV)BM056-3-2-FMGTCost of CapitalMathematically:FV1 = PV0 (1 + i)1FV2 = PV0 (1 + i)2FV3 = PV0 (1 + i)3FVt = PV0 (1 + i)t

Plugging the numbers in the mathematical notations:FV1= RM100 (1 + 10%)1= RM100 (1 + 0.1)1 = RM100 (1.1)1= RM110

Slide 5 of 585. Compounding and Future Value (FV)BM056-3-2-FMGTCost of CapitalPlugging the numbers in the mathematical notations:FV2= RM100 (1 + 10%)2= RM100 (1 + 0.1)2= RM100 (1.1)2= RM100 (1.1 x 1.1)= RM100 (1.21)= RM121Slide 5 of 585. Compounding and Future Value (FV)BM056-3-2-FMGTCost of CapitalPlugging the numbers in the mathematical notations:FV3= RM100 (1 + 10%)3= RM100 (1 + 0.1)3= RM100 (1.1)3= RM100 (1.1 x 1.1 x 1.1)= RM100 (1.331)= RM133.10Slide 5 of 585. Compounding and Future Value (FV)BM056-3-2-FMGTCost of CapitalSlide 5 of 586. Discounting and Present Value (PV)Using Tutorial Questions 4 , 5 and 6 on Compound Interest

Given:Present Value at Year 0 (PV0) = RM100Future Value at Year 1 (FV1) = RM110Future Value at Year 2 (FV2) = RM121Future Value at Year 3 (FV3) = RM133.10Interest Rate (i)= 10% per annumBM056-3-2-FMGTCost of CapitalMathematically, rearrange to write PV0 on the left of the equation:PV0 = FV1__ (1 + i)1

PV0 = FV2__ (1 + i)2

PV0 = FV3__ (1 + i)3

PV0 = FVt__ (1 + i)t

Slide 5 of 586. Discounting and Present Value (PV)BM056-3-2-FMGTCost of CapitalPlugging the numbers in the mathematical notations:PV0= FV1__ (1 + i)1= RM110__ (1 + 10%)1= RM110_ (1 + 0.1)1 = RM110(1.1)1= RM100Slide 5 of 586. Discounting and Present Value (PV)BM056-3-2-FMGTCost of CapitalPlugging the numbers in the mathematical notations:PV0= FV2__ (1 + i)2= RM121__ (1 + 10%)2= RM121_ (1 + 0.1)2= RM121(1.1)2= RM121(1.1 x 1.1)= RM121 1.21= RM100Slide 5 of 586. Discounting and Present Value (PV)BM056-3-2-FMGTCost of CapitalPlugging the numbers in the mathematical notations:PV0= FV3__ (1 + i)3= RM133.10 (1 + 10%)3= RM133.10 (1 + 0.1)3= RM133.10(1.1)3= RM133.10(1.1 x 1.1 x 1.1)= RM133.10 1.331= RM100Slide 5 of 586. Discounting and Present Value (PV)BM056-3-2-FMGTCost of CapitalPrincipal Amount= Investment Amount= Present Value at Year 0

The original Principal Amount= The initial Principal Amount

Repayment Amount= Future Value

Slide 5 of 587. GlossaryBM056-3-2-FMGTCost of CapitalAnnual Interest Rate= Yearly Interest Rate

Interest Rate of 10% per annum= Interest Rate of 10% per year= Interest Rate of 10% annually= Interest Rate of 10% yearly

Interest amount is calculated= Interest amount is paid= Interest amount is chargedSlide 5 of 587. Glossary (Cont)BM056-3-2-FMGTCost of CapitalPV0 = Present Value at Year 0PV1 = Present Value at Year 1PV2 = Present Value at Year 2PV3 = Present Value at Year 3PVt = Present Value at Year t

FV1 = Future Value at Year 1FV2 = Future Value at Year 2FV3 = Future Value at Year 3FVt = Future Value at Year tSlide 5 of 587. Glossary (Cont)BM056-3-2-FMGTCost of CapitalTHANK YOUSlide 58 of 58BM056-3-2-FMGTCost of CapitalUsing Example 1. Alice lends Betty RM100, from 6 November 2014 to 6 November 2017. The lending/borrowing period is 3 years. Interest Rate = 10% per annum.On 6 November 2015,What is the Future Value/Repayment Amount to be paid by Betty?ORWhat is the Future Value/Repayment Amount to be received by Alice?Slide 5 of 58Week 4: TutorialsSimple InterestBM056-3-2-FMGTCost of CapitalUsing Example 1. Alice lends Betty RM100, from 6 November 2014 to 6 November 2017. The lending/borrowing period is 2 years. Interest Rate = 10% per annum.On 6 November 2016,What is the Future Value/Repayment Amount to be paid by Betty?ORWhat is the Future Value/Repayment Amount to be received by Alice?Slide 5 of 58Week 4: Tutorials (Cont)Simple InterestBM056-3-2-FMGTCost of CapitalUsing Example 1. Alice lends Betty RM100, from 6 November 2014 to 6 November 2017. The lending/borrowing period is 3 years. Interest Rate = 10% per annum.On 6 November 2017,What is the Future Value/Repayment Amount to be paid by Betty?ORWhat is the Future Value/Repayment Amount to be received by Alice?Slide 5 of 58Week 4: Tutorials (Cont)Simple InterestBM056-3-2-FMGTCost of CapitalUsing Example 1. Alice lends Betty RM100, from 6 November 2014 to 6 November 2017. The lending/borrowing period is 3 years. Interest Rate = 10% per annum.Interest paid is re-invested/compounded annually/yearly.On 6 November 2015,What is the Future Value/Repayment Amount to be paid by Betty?ORWhat is the Future Value/Repayment Amount to be received by Alice?Slide 5 of 58Week 4: Tutorials (Cont)Compound InterestBM056-3-2-FMGTCost of CapitalUsing Example 1. Alice lends Betty RM100, from 6 November 2014 to 6 November 2017. The lending/borrowing period is 3 years. Interest Rate = 10% per annum.Interest paid is re-invested/compounded annually/yearly.On 6 November 2016,What is the Future Value/Repayment Amount to be paid by Betty?ORWhat is the Future Value/Repayment Amount to be received by Alice?Slide 5 of 58Week 4: Tutorials (Cont)Compound InterestBM056-3-2-FMGTCost of CapitalUsing Example 1. Alice lends Betty RM100, from 6 November 2014 to 6 November 2017. The lending/borrowing period is 3 years. Interest Rate = 10% per annum.Interest paid is re-invested/compounded annually/yearly.On 6 November 2017,What is the Future Value/Repayment Amount to be paid by Betty?ORWhat is the Future Value/Repayment Amount to be received by Alice?Slide 5 of 58Week 4: Tutorials (Cont)Compound InterestBM056-3-2-FMGTCost of CapitalWhat are your conclusions after completing Questions 1 to 6?Slide 5 of 58Week 4: Tutorials (Cont)Simple Interest vs. Compound InterestBM056-3-2-FMGTCost of CapitalA sum of RM2.5 million invested for 3 years at an interest rate of 7.75% per annum. Calculate the future value of the investment.Slide 5 of 58Week 4: Tutorials (Cont)Compound InterestBM056-3-2-FMGTCost of CapitalA sum of RM0.75 million invested for 5 years at an interest rate of 8.5% per annum. Calculate the future value of the investment.

Slide 5 of 58Week 4: Tutorials (Cont)Compound InterestBM056-3-2-FMGTCost of CapitalA sum of RM650,000 invested for 7 years at an interest rate of 5.75% per annum. Calculate the future value of the investment.Slide 5 of 58Week 4: Tutorials (Cont)Compound InterestBM056-3-2-FMGTCost of CapitalAttendance List:Please sign in the box with black or blue pen.

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SAJID AHMED IBRAHIM, TP030473?Week 4: UpdatesSlide 57 of 58BM056-3-2-FMGTCost of CapitalAsia Pacific University of Technology and Innovation#Slide 57 of 58BM056-3.5-2-FMGT-T-2 students:Only UC2F1410IBM students

Who were the 2 students unaware of the 2nd replacement class on 30 October 2014, Thursday, 1305-1505?

If you are Absent with Reason from a class, please inform Rachel your reason of absence:face-to-face in the next class, ORby sending an email at cheahwaikuan@gmail.comWeek 4: Updates (Cont)BM056-3-2-FMGTCost of CapitalAsia Pacific University of Technology and Innovation#Week 4: Updates (Cont)Slide 57 of 58MOHAMMAD NOOR QAWYY HJ JAYAH (TP036886)Confirm on Absent with Reason:13 October 2014, Monday, 12:10-13:10, LectureArrived in Malaysia from Brunei14 October 2014, Tuesday, 16:00-18:00, Tutorial 1Did medical check-upBM056-3-2-FMGTCost of CapitalAsia Pacific University of Technology and Innovation#Week 4: Updates (Cont)Slide 57 of 58Individual Assignments Due Date is the same. It falls in Week 10.

BM056-3-2-FMGTCost of CapitalAsia Pacific University of Technology and Innovation#Week 4: Updates (Cont)Slide 57 of 58Class Test (Week 13, 90 minutes):

BM056-3-2-FMGTCost of CapitalAsia Pacific University of Technology and Innovation#