Study Objectives for Unit 2

Unit 2, the time value of Money, is the foundation for most of the rest of this corporate finance class and for the entire field of finance. Unless you thoroughly understand the material covered in this unit, you will likely not understand most of the upcoming materials. What is really important is that you understand what each term (present value, future value, discount rate and number of periods) in the formulas presented means and how to use the formulas in simple and complex situations. This is best achieved by practicing multiple exercise and problems like those in the book and in the online learning center. You must be able to solve problems like: If I deposit $1,000 today at an annual rate of 8% for 5 years, how much will I have at the end of the 5 years? (Answer: 1,469.33) You must be able to answer questions like: Which is better getting 12% interest on $100 for a two year term or getting 6% interest on $100 for a one year term and then re-depositing the proceeds again at 6% for a second year? (Answer: Deposit at 6% for one year to get $106 and then deposit this at 6% for another year to get 112.36 at the end of the second year, which is better than getting $112 at the end of the second year). While there are alternate ways of solving time-value-of-money problems (i.e. formulas, tables, financial calculators, Microsoft Excel), in todays world, Excel is the go-to resource for the task. Therefore, while you should be familiar with all the methods listed above, it is imperative that you master Microsoft Excels financial functions, especially PV, FV, RATE, NPER and (in future units) PMT. To help you achieve this, you can see the write up in our textbook (p.137) and see some of the resources posted in the Course Documents tab on BB. If you feel like there is anything at all in the material covered that is not clear, please post your doubts to the Class Questions forum in the Discussion Board. This will help you perform better in assignments and tests as well as understand the material we will be covering in upcoming units.