11. Ch#5 Time Value of Money || Mix Stream || Problem P5-28 || J. Gitman || Financial Management
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11. Ch#5 Time Value of Money || Mix Stream || Problem P5-28 || J. Gitman || Financial Management |
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To Watch Complete course of Financial Management Click the link below
https://www.youtube.com/playlist?list=PLLHaTl272lJUnP8hnNTYerRVR_riVMwCB
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Topic: Value of an Annuity versus a single amount.
COURSE TITLE: FINANCIAL MANAGEMENT
CHAPTER#5 Time Value of Money
LECTURE# 11
In this lecture I shall discuss Solution of Problem number 28 of Chapter 5 Time Value Money from Book Principles of Managerial Finance by lawrence j. gitman (13th edition), which is related to Mix Stream
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Time Value of Money (TVM) is a fundamental concept in financial management that recognizes the principle that a dollar received today is worth more than a dollar received in the future. It is based on the premise that money has a time-based value due to its potential to earn interest or generate returns over time. Here's a detailed description of TVM:
Basic Principle:
TVM is founded on the principle that money has a time-related value. In other words, the value of money changes over time due to factors such as inflation, opportunity cost, and the ability to earn returns on investments.
Key Components:
Present Value (PV): PV represents the current worth of a future sum of money, discounted at a specific rate of return (interest rate).
Future Value (FV): FV represents the value of an investment or sum of money at a specific future date, accounting for interest or returns earned over time.
Interest Rate (r): The rate at which money grows over time, commonly referred to as the discount rate, required rate of return, or interest rate.
Applications of TVM:
Investment Analysis: TVM is extensively used in investment analysis to evaluate the profitability of investments, assess risks, and make informed decisions about allocating capital.
Loan Amortization: In loan financing, TVM helps calculate loan payments, determine the total interest cost over the loan term, and assess the affordability of borrowing.
Capital Budgeting: TVM assists in evaluating capital budgeting decisions by comparing the present value of cash inflows and outflows associated with investment projects.
Retirement Planning: TVM is crucial in retirement planning to estimate future savings needs, determine appropriate contribution amounts, and evaluate retirement income strategies.
Time Value Formulas:
PV = FV / (1 + r)^n
FV = PV * (1 + r)^n
Where PV = Present Value, FV = Future Value, r = Interest Rate, and n = Number of Periods.
Considerations:
TVM considers the opportunity cost of money, emphasizing the importance of earning a return on investments or savings to maintain or increase purchasing power over time.
TVM accounts for inflation, as the purchasing power of money decreases over time due to rising prices, thereby affecting the real value of future cash flows.
Risk and Uncertainty:
TVM does not consider risk or uncertainty inherent in future cash flows, and it assumes that future cash flows are certain and predictable.
Adjustments may be necessary to account for risk factors such as volatility, market fluctuations, and credit risk.
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Course Contents of Financial Managements are
(1) Bond Valuation
(2)CAPITAL BUDGETING TECHNIQUES(CBT)
(3) CASH BUDGET
(4) CASH FLOW STATEMANT
(5) COST OF CAPITAL (COC)
(6) LEVERAGE
(7) RATIO ANALYSIS
(8) STOCK VALUATION
(9) TIME VALUE OF MONEY (TVM)
(10) WORKING CAPITAL MANAGEMENT (WCM)
(11) FINANCIAL MANAGEMENT PAST PAPERS
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