1. Chapter 27
Basic Tools
of
Finance

2. Survey
Question 1
What would you prefer?
A. Win 1,000 riyals
B. Flip a coin:
50 percent chance you win 2,000 riyals
50 percent chance you win nothing.

3. Survey
Question 2
What would you prefer?
A. Lose 1,000 riyals
B. Flip a coin:
50 percent chance you lose 2,000 riyals
50 percent chance you lose nothing.

4. Payback?
One year?
Five years?
Ten years?

5. Promissory Note
I.O. U.
10 SAR
Dr. Gale
Trading paper for paper

6. Finance
Time and Risk

7. Key Formula 1
Future Value or FV
N
(1+r)
r = rate
N = number of periods

8. r = 7% N FV
N=3 1 1.070
FV =? 2 1.145
3 1.225
N
(1+r)

9. r = 10% N FV
N=5 1 1.100
FV =? 2 1.210
3 1.331
N
(1+r) 4 1.464
5 1.611

10. r = 15% N FV
N=3 1 1.150
FV =? 2 1.323
3 1.521
N
(1+r)

11. r = 15% N FV
N=3 1 1.150
FV =? 2 1.323
3 1.521
N
(1+r)

12. Key Formula 2
Present Value or PV
1 Reciprocal
of the
N
(1+r) FV formula
r = rate
N = number of periods

13. r = 7% N PV
N=3 1 .935
PV =? 2 .873
3 .816
1
N
(1+r)

14. r = 10% N PV
N=5 1 .909
PV =? 2 .826
3 .751
1 4 .683
N
(1+r) 5 .621