Gautam Kaul - intro to finance

Most important point -

A dollar today is worth more than a dollar tomorrow


Passage of time itself has value



Example 1-

Suppose a bank pays a 10 % interest rate per year and you are give a choice between two plans:
1)  100 today
2) 100 , a year from now

Answer -

• Time line  - visualise 
• Future value 1 - 110
• Future value 2 - 100
• Therefore the answer is - 1

You can not compare money across time , interest has to be taken into account

Bring both to same time line - either fv or pv 

Let’s calculate feature value -

Fv = P + r*P = (1 + r)*P


Example 2 -
 Time line -
Calculate final future value , manual calculate intermittent future value as well
= 121

Fv2 = (1+r)^n*P