Chapter 4: Present Values: Concepts and Methods

The following sections are included:

• Introduction

• Basic Concepts of Present Values

• Foundation of NPV Rules

• Compounding and Discounting Processes

  • Single payment case — Future values

  • Continuous compounding

  • Single payment case — Present values

  • Annuity case — Present values

  • Annuity case — Future values

  • Annual percentage rate (APR)

• Present and Future Value Tables

  • Future value of a dollar at the end of t periods

  • Future value of a dollar continuously compounded

  • Present value of a dollar received t periods in the future

  • Present value of an annuity of a dollar per period

• Why Present Values are Basic Tools for Financial Management Decisions

  • Managing in the stockholders’ interest

  • Productive investments

• Liquidity Preference

• Summary

• Appendix 4A — Three Hypotheses about Inflation and the Firm’s Value

• Appendix 4B — Book Value, Replacement Cost, and Tobin’s q

• Appendix 4C — Continuous Compounding and Continuous Discounting

  • Continuous Compounding

  • Continuous Discounting

• Appendix 4D — Applications of Excel for Calculating Time Value of Money

  • Future Value of a Single Amount

  • Present Value of a Single Amount

  • Future Value of an Ordinary Annuity

  • Present Value of an Ordinary Annuity

• Appendix 4E — Tables of Time Value of Money

  • Future Value Table (Annually Compounded)

  • Future Value Table (Continuously Compounded)

  • Present Value Table — Present Value of a Dollar Received t Periods in the Future

  • Present Value Table — Present Value of an Annuity of a Dollar per Period