FIN2 CASE, SLP, Thread Discussion
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Module 2 - Home
Present Value
Modular Learning Outcomes
Upon successful completion of this module, the student will be able to satisfy the following outcomes:
•Case ◦Explain the concept of present value.
◦Calculate the present value of a future stream of income.
◦Describe the determinants of the discount factor.
◦Explain the determinants of present value.
•SLP ◦Explain the concept of present value.
◦Describe the determinants of the discount factor.
◦Explain the determinants of present value.
•Discussion ◦Explain the concept of present value.
◦Describe the determinants of the discount factor.
Module Overview
In order to value assets such as stocks, bonds, or investment projects, you need to be able to place a value on payments that you will receive in the future. If you as a financial manager with to invest in some new equipment, you need to be able to place a value on the total amount of additional profits your company will receive over the next several years due to this new purchase.
In general, people prefer to have money paid to them today rather than tomorrow. The value of one dollar today is exactly one dollar. But what about being paid one dollar exactly one year from now? Would you pay a dollar for the that dollar to be paid to you in one year? Definitely not! Of course you pay significantly less than one dollar for a promise of being paid one dollar in the future. Inflation is just one factor that you would have to consider when you decide how much you should pay for the promise of a future dollar to be paid to you. The amount you are willing to pay for income to be paid in the future is called the present value.
Most assets, such as stocks and bonds, provide payoffs not today but in the distant future. This is the same with an investment project a corporation takes on, including equipment or other big purchases. But in order to make decisions that affect your payoffs in the future, you have to be able to estimate the present value of these future payoffs.
