Week 5 - Ch 6 - Discussion Questions 1, 2 The Time Value of Money (TVM) is a fundamental concept in finance. As such formulas, tables, spreadsheets, and manual calculations yield correct answer depending on the set-up and needs. Compounding and discounting interest rates for a time period, periodic payments, and time periods and time direction are variables of the formulas to yield answers. Here's a table unifying some of the formulas. It can be used in conjunction with pages 286 of Zelman 5^th ed. (284-285 of Zelman 4^th ed.), or, of course Excel.

I suspect most of you have dealt with interest calculations since secondary school math. You may have used 'cash flow or TVM' diagrams to visualize the effect of each variable.

Compared to Exhibit 6.3, page 264, (Zelman 4^th or 5^th ed.) here's a graph of the loss of a dollar over time due to various inflation rates.

You may have heard of the 'Rule of 72' , Notice on this graph how much time it takes for $1000 to lose value to $500 at 7% rate. As a refresher, I suggest you exercise your (financial) calculator or Excel spreadsheet to verify some of the calculation examples in Zelman. If you use Excel formulas, DO NOT enter commas in the dollar amounts. Instead of 10,000, use 10000. Enter dollars paid out as a negative number and enter interest rate as a percent. Understanding Present Value calculations as per Zelman pages 267-270 5^th Ed (pages 267-269 4^th Ed.) is good preparation for upcoming Chapter 7 "The Investment Decision" materials. Notice the different answers of entering '-16,105' instead of '-16105'; '16105' instead of '-16105'; and '10' instead of '10%' in Exhibit 6.8 Simply remember: Present Value ---- compounding into the ----> Future Value Present Value <--- discounting from the ----- Future Value This week's questions are directly from Zelman, page 287 5^th ed. (page 286 4^th ed.). They should be straightforward and give you plenty of time to catch up, take a short break, or read ahead.

The chapter is short but the subject matter is a fundamental topic in finance.

Question 1 (= Zelman Question 8) What is the relationship between the present value factor and the future value factor? Question 2 (= Zelman Question 9) a) What happens to the present value factor as the discount rate or the interest rate increases for a given period of time? b) As the discount rate or the interest rate decreases?