Chapter 15 Investment, Time and Capital Markets
Chapter 15 Investment, Time, and Capital Markets
Topics to be Discussed a Stocks versus Flows Present discounted value ■ The va| ue of a bond a The net present value criterion for Capital Investment Decisions Chapter 15 Slide 2
Chapter 15 Slide 2 Topics to be Discussed ◼ Stocks Versus Flows ◼ Present Discounted Value ◼ The Value of a Bond ◼ The Net Present Value Criterion for Capital Investment Decisions
Topics to be Discussed ■ Adjustments for Risk a Investment Decisions by Consumers a Intertemporal Production Decisions Depletable Resources How are Interest rates determined? Chapter 15 Slide 3
Chapter 15 Slide 3 Topics to be Discussed ◼ Adjustments for Risk ◼ Investment Decisions by Consumers ◼ Intertemporal Production Decisions--- Depletable Resources ◼ How are Interest Rates Determined?
Introduction a Capital o Choosing an input that will contribute to output over a long period of time o Comparing the future value to current expenditures Chapter 15 Slide 4
Chapter 15 Slide 4 Introduction ◼ Capital ⚫ Choosing an input that will contribute to output over a long period of time ⚫ Comparing the future value to current expenditures
Stocks versus flows Stock o Capital is a stock measurement The amount of capital a company owns Chapter 15 Slide 5
Chapter 15 Slide 5 Stocks Versus Flows ◼ Stock ⚫ Capital is a stock measurement. ◆The amount of capital a company owns
Stocks versus flows ■ Flows o Variable inputs and outputs are flow measurements .An amount per time period Chapter 15 Slide 6
Chapter 15 Slide 6 Stocks Versus Flows ◼ Flows ⚫ Variable inputs and outputs are flow measurements. ◆An amount per time period
Present Discounted Value(PDV a Determining the value today of a future flow of income o The value of a future payment must be discounted for the time period and interest rate that could be earned Chapter 15 Slide 7
Chapter 15 Slide 7 Present Discounted Value (PDV) ◼ Determining the value today of a future flow of income ⚫ The value of a future payment must be discounted for the time period and interest rate that could be earned
Present Discounted Value(PDV a Future Value(Fv) Future Dollar Value of $invested today=(1+R) PDV=Present dollar value of $1 received in the future (1+R)" (how much would you have to invest today to have a dollar in the future) Chapter 15 Slide 8
Chapter 15 Slide 8 Present Discounted Value (PDV) ◼ Future Value (FV) invest today to have a dollar i n the future) ; (how much would you have to (1 1 i n the future PDV Present dollar value of $1received Future Dollar Value of $1invested today (1 n ) ) n R R + = = = +
Present Discounted Value(PDV Question e What impact does have on the Pdv? Chapter 15 Slide 9
Chapter 15 Slide 9 Present Discounted Value (PDV) ◼ Question ⚫ What impact does R have on the PDV?
PDV of $1 Paid in the Future Interest Rate 1 Year 2 Years 3 Years 4 Years 5 Years 6 Years 0.01$0.990$0.980$0.951$0.905$0.820$0.742 0.02 0.9800.961 0.9060.8200.673 0.552 0.03 0.971 0.943 0.8630.744 0.554 0.412 0.04 0.962 0.925 0.8220.6760.4560.308 0.05 0.9520.907 0.7840.614 0.377 0.231 0.06 0.9430.890 0.7470.558 0.312 0.174
PDV of $1 Paid in the Future 0.01 $0.990 $0.980 $0.951 $0.905 $0.820 $0.742 0.02 0.980 0.961 0.906 0.820 0.673 0.552 0.03 0.971 0.943 0.863 0.744 0.554 0.412 0.04 0.962 0.925 0.822 0.676 0.456 0.308 0.05 0.952 0.907 0.784 0.614 0.377 0.231 0.06 0.943 0.890 0.747 0.558 0.312 0.174 Interest Rate 1 Year 2 Years 3 Years 4 Years 5 Years 6 Years