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1、CHAPTER15TimeValueofMoneyInthischapteryoulearntoconvertcashflowsoccurringinonetimeperiodtoanequivalentcashflowoccurringatanothertimeperiodorintoauniformseriesofcashflowsoccurringoversuccessiveperiods.Understandingthetimevalueofmoneyisaprerequisitetounderstan
2、dingdebtfinancingandhowtocomparetwoormorefinancialoptions,whicharethetopicsofChapters16,17,and18.Addition-ally,youlearnhowtoadjustinterestratesforinflation.SupposethatIweretooffertogiveyou$1,000todayor$1,000ayearfromnow.Whichwouldyoutake?Mostpeoplewouldtaket
3、he$1,000todaybe-causeadollartodayisworthmorethanadollartomorrow.Money’svalueisbasednotonlyontheamountofmoneyreceivedbutalsoonwhenthemoneyisreceived.Inthecaseofthe$1,000,theamountofmoneyreceivedisthesame;however,theamountsarereceivedatdifferentpointsintime.Ea
4、chofyoucouldhavetakenthe$1,000today,investeditinthebankandattheendoftheyearhadtheoriginal$1,000plustheinterestpaidbythebankfortheuseofyourmoney.Ifthebankwerepayinganinterestrateof5%compoundedannually,theoriginal$1,000investmentwouldhaveearned$50($1,0000.05)
5、interestforatotalof$1,050bytheendofthefirstyear.Therefore,$1,000receivedtodaywouldbeequivalent,althoughnotequalinamount,to$1,050receivedayearfromnowbasedonaninterestrateof5%compoundedannually.NowsupposethatIweretooffertogiveyou$1,000todayor$1,050ayearfromnow
6、.Whichwouldyoutake?First,wenoticethattheamountsofmoneyreceivedaredifferent.Thereceiptayearfromnowis$50greater.However,thesereceiptsareequivalentwhencomparedataninterestrateof5%compoundedan-nuallybecause$1,000investedtodayataninterestrateof5%compoundedan-nual
7、lywouldearn$50interestandbeworth$1,050ayearfromnow,whichisthesameasthepaymentayearfromnow.341342CHAPTER15EQUIVALENCEEquivalentcashflowsarecashflowsthatproducethesameresultoveraspecificperiodoftime.Intheexampleonthepreviouspageyouwouldhavethesameamountofcasha
8、ttheendofthefirstyearregardlessofwhetheryouchosetore-ceivethe$1,000todayandinvestitataninterestrateof5%compoundedannu-allyoryouchosetoreceivethe$1,050ayearfromnow.Equivalenceisafunctionofthefoll
