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Finance
Chapter 3
Time Value of Money: An Introduction

Copyright © 2012 Pearson Education.

Chapter Outline
3.1 Cost-Benefit Analysis 3.2 Market Prices and the Valuation Principle 3.3 The Time Value of Money and Interest Rates 3.4 Valuing Cash Flows at Different Points in Time

Copyright © 2012 Pearson Education.

3-2

Learning Objectives
• Identify the role of financial managers and competitive markets in decision making • Understand the Valuation Principle, and how it can be used to identify decisions that increase the value of the firm • Assess the effect of interest rates on today’s value of future cash flows • Calculate the value of distant cash flows in the present and of current cash flows in the future
Copyright © 2012 Pearson Education.

3-3

3.1 Cost-Benefit Analysis
• Role of the Financial Manager
– Make decisions on behalf of the firm’s investors
• For good decisions, the benefits exceeds the costs

Copyright © 2012 Pearson Education.

3-4

3.1 Cost-Benefit Analysis
• Role of the Financial Manager
– Real-world opportunities are often difficult to quantify and involve using skills from other management disciplines:
• • • • • Marketing Economics Organizational Behavior Strategy Operations

Copyright © © 2009 Pearson Prentice Copyright 2012 Pearson Education.

Hall. All rights reserved.

3-5

3-5

3.1 Cost-Benefit Analysis
• Quantifying Costs and Benefits
– Any decision in which the value of the benefits exceeds the costs will increase the value of the firm

Copyright © 2012 Pearson Education.

3-6

3.1 Cost-Benefit Analysis
• Quantifying Costs and Benefits
– Suppose a jewelry manufacturer has the opportunity to trade 200 ounces of silver and receive 10 ounces of gold today. – To compare the costs and benefits, we first need to convert them to a common unit.

Copyright © 2012 Pearson Education.

3-7

3.1 Cost-Benefit Analysis
• Quantifying Costs and Benefits
– If the current market price for silver
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