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  3. Equity Valuation in R

Exercise

Time Value of Money

The basic premise of time value of money is that you would rather receive $1 today than $1 tomorrow, so to forego $1 today you will have to be induced to receive more that $1 in the future. How much more would it take to make you indifferent from receiving the $1 today and waiting? Let's assume that you expect to earn a 5% annual return on a comparable investment, we can use that rate to calculate the value today of receiving $1 one year from now. We can then easily extend this calculation to receiving $1 two years from now and so on. For this exercise, the variables future value fv, which equals $100, and the expected return r, which equals 5%, are stored in memory. Use these variables to calculate the present value of $100 one year from now and $100 two years from now. You will see that the farther out we go, that same $100 is worth less and less today.

Instructions

100 XP
  • Calculate the present value of $100 one year from now.
  • Calculate the present value of $100 two years from now.