Corporate Finances Ch 5&6

5.1 “A dollar today is worth more than a dollar tomorrow.” This phrase which means that the time value of the dollar has more purchasing power today than it may have tomorrow. The inflation and interest rate make the value of the dollar, and the value declines with time passing.

5.2 A timeline is very important in determining the timing of cash flows in finance. Timelines generally have a start and end point, but may be infinite as well. Points on the timeline represent incoming or leaving cash flows between a time of days, months or years on any periodic interval.

5.3 The two concepts important to know in the time value of money are the inflation and interest rate. The inflation is the tendency that prices of goods and services will increase over a period of time. Inflation is not much visible on a short period of time as it is over a longer period. Interest rate is the dollar or money one can earn to give away or store money in a financial institution. Loans are generally associated with interest rates, a way lenders make money besides getting back the borrowed amount.

5.4 Future value represents the value on a future date and time, whereas the present value is the value it is today. We need this when cash flows are received on a future date; we want to know what the cash flow was on the present date to determine profit or loss perhaps.

5.5 Compounding refers to the process of converting a current amount of money into a future amount by using an interest rate. The value in a future date would be higher than today because of the value of the goods or service plus the interest rate. Discounting is the process of converting a future value of cash flows by using a discount rate.

5.6 Simple Interest is the interest that will not be paid on the interest earned in prior years. This means that the interest earned in one year is not counted towards the new interest at the end of another year. Compounding would be the terms used to earn interest on the interest...