ACST1001 Lecture 3

Chapter 1: Introduction

• Congratulatory Remarks: Congratulations to students for completing problem set one successfully.

• Purpose of Problem Sets:

  • Designed to keep students engaged throughout the session.

  • Aim is to build student confidence and skills.

• Weekly Tutorials: Emphasis on completing tutorials to prepare for problem sets.

• Reflection Submission:

  • Final reflection on engagement with problem sets is due in week 10.

  • Recommendation to write mini reflections (1 paragraph or bullet points) after each problem set to track progress.

  • Suggested elements for reflections:

    • If problems were straightforward, note preparation strategies such as reviewing lecture notes and tutorial questions.

    • If challenges arose, document attempts, reviews, and improvements.

• Focus of Week:

  • Tools for financial decision-making.

  • Review of concepts from week one: valuation principle, costs and benefits, financial assets, and real assets.

• Valuation Principle:

  • Accept decisions if benefits exceed costs.

  • Benefits and costs must be comparable at the same time.

  • Introduction to market prices and interest rates for evaluation.

• Time Value of Money (TVM):

  • Importance of understanding that the value of money changes over time due to inflation and interest.

  • Discussion on comparing cash flows today vs. in the future, specifically single cash flows and their values over time.

• Introduction to Excel:

  • First exposure to using Excel for financial calculations, focusing on functions related to time value of money.

Chapter 2: Value Of Gold

• Optimal Financial Decisions:

  • Identification of costs and benefits and their comparative analysis over time.

  • Importance of a common unit for assessment: dollars today.

• Market Prices:

  • Key role in determining value for costs and benefits.

• Example of Exchange:

  • Trading silver for gold illustrates quantifying costs and benefits using market prices.

  • Calculation of costs and benefits:

    • Cost of 400 ounces of silver at $20/ounce = $8,000.

    • Benefit of 5 ounces of gold at $2,000/ounce = $10,000.

    • Net value of transaction is $2,000 gain, hence optimal decision to proceed with the trade.

• Business Considerations:

  • Evaluate the necessity of products and the potential to sell excess assets.

  • Competitive pricing and market strategies impact financial decision-making.

Chapter 3: Year To Dollars

• Bid and Ask Prices:

  • In financial markets, buying and selling prices differ due to market dynamics.

• Key Takeaways of Valuation Principle:

  • Benefit exceeding costs denotes wealth increase.

• Example of Asset Acquisition:

  • Purchasing oil and copper at a total cost of $25,000 and determining net values through market prices.

  • Total value of received assets calculated to determine acceptance of trade, demonstrating the necessity of comparative analysis through market prices.

Chapter 4: Year Or Dollars

• Compounding and Discounting:

  • Compounding: Moving cash flows into the future; utilizes interest rate factors to calculate future value.

  • Discounting: Moving future cash flows back to present value, important for comparison.

• Illustration of Cash Flows:

  • Present value and future value are illustrated through cash flow examples.

Chapter 5: Value Of Cash

• Interest Rate Concepts:

  • Examination of interest rates in relation to investment costs and benefits over time.

• Net Present Value (NPV):

  • Emphasis that NPV must be positive to warrant acceptance of investment decisions.

Chapter 6: Generalized Future Value Formula

• Understanding Future Value:

  • Examples illustrated of compounding dollars forward using a generalized future value formula.

• Present Value Calculations:

  • Reiteration of present value calculations through dividing future cash flows by interest rates.

  • Use of spreadsheets to organize calculations for clarity.

Chapter 7: Future Value Function

• Excel Functionality:

  • Introduction to Excel financial functions and their application in calculating future and present values.

• Demonstration of Builds:

  • Building calculations in Excel enhances understanding and performance in financial tasks.

Chapter 8: Conclusion

• Wrap-up:

  • Summary of learned concepts from the chapters and setting the stage for future topics in finance.