present and future values

on our cashflow diagram, how did we denote the cashflow at date t

C₁

how do we denote the cashflow today then (t=0)

C₀

how can we relate C₀ and C₁

finding out what amount of money at t=1 is worth the same as C₀ today would make the two values equivalent

what would the C₁ be called in this case

the future value of C₀ at time 1

and so what would C₀ be called

the present value of C₁

one would be ___________ between receiving money today or waiting one year if offered this choice

indifferent

what determines the difference between the future value and present value

the interest rate!!!

what is the formula we have to represent that

for example if the interest rate is 5%, you could have £105 divided by £100 as the numbers in this equation, which would be 1.05, which is 1 plus the interest rate of 0.05 (5%)

because if you were to invest your £100 at 5% interest you could end up with £105 so that’s why its worth that to you in one period’s time

so what does r represent

the one period interest rate

what is in interest rate

the price of money - the reward per £ of consumption foregone that is given to lenders and savers for accepting delayed gratification

what is a rate of return

measures the percentage change in the value of an investment

what is the rate of return on an investment that costs C₀ today and pays FV₁(C₀) in one period

equal to the interest rate, since these values are the future and present value of one another

when making an investment, the rate of return should be……

……bigger than the interest rate at the time to make the investment worth it