Corporate Finance · Session Companion

Session 2 Companion: Time Is Money

Everything we discussed in class, now something you can play with. Change the numbers, break the formulas, and check the stories yourself.

Corporate Finance · Session 2
Before the formulas

Where the words come from

The name of this course already tells you what it is about.

Corporate
Latin corpus, "body" → corporare, "to form into a body"
Many people, one body in law. In English since the early 1400s.
Finance
Old French finer, "to settle a debt" ← Latin finis, "end"
Originally: bringing what is owed to an end. "Managing money" only from 1770.
Company
Late Latin companio, "bread-fellow" ← com + panis
Those who share bread. A business sense from the 1550s.
Nasik, 2nd century CE. Weavers' guilds (śreṇī) at Govardhana held deposits: 2,000 kārṣāpaṇas at 1% a month and 1,000 at ¾% a month. Guilds acting as banks, about 1,800 years ago.
Kautilya's Arthaśāstra. Monthly interest of 1¼% (just), 5% (commercial), 10% (forest trade), 20% (sea trade). A risk premium written down over two thousand years ago. Convert them to annual rates in Challenge E.
The core idea

The two-way machine

Compounding moves money forward in time. Discounting brings it back. It is one equation read in two directions: FV = PV × (1 + r)ⁿ.

Today (PV)
₹1,00,000
compound → × (1+r)ⁿ
← discount ÷ (1+r)ⁿ
Future (FV) · Year 5
₹1,46,933
Try this: double the years, then double the rate. Which one moves FV more? Now watch what happens to the discount factor, 1 ÷ (1+r)ⁿ = 0.681.
Check the stories yourself

Six challenges

Each one comes from something we discussed. Predict the answer before you calculate it.

A · The KBC choice

₹1 crore now, or ₹1.2 crore later?

Present value of the later amount

B · Fry's bank account

Futurama: 93 cents at 2.25% a year, left for 1,000 years. The show says $4.3 billion. Is it right?

Future value

C · "21 din mein paisa double"

Phir Hera Pheri. What annual return does a promise like this imply?

Implied annual return

D · Rule of 72 vs the exact answer

How long until money doubles? 72 ÷ rate is the shortcut.

Rule of 72
Exact

E · Kautilya's risk ladder

Monthly rates from the Arthaśāstra, compounded into annual rates: (1 + m)¹² − 1.

Type of lendingPer monthPer year (compounded)

The higher the risk of the venture, the higher the rate. That is the risk-and-return idea, well over two thousand years old.

F · How often is interest added?

The same quoted rate earns more the more often it compounds.

Effective annual rate = (1 + r/m)ᵐ − 1
This is why the quoted rate on a loan and what you actually pay are different.
Myth check. "Compound interest is the eighth wonder of the world" is usually credited to Einstein. Quote Investigator found no evidence that he said it. The earliest known version is an unsigned 1925 newspaper advertisement for a savings and loan company. Check your sources, even for good quotes.
Capital budgeting preview

You are Kodak's CFO in 1981

Kodak invented the digital camera in 1975 and filed for bankruptcy in 2012. Should it have gone digital? The answer depends on what you assume would have happened without the project. Numbers are illustrative, in $ million.

Yr 012345
NPV of going digital, against this baseline

Edit any cash flow. Incremental cash flow = with the project − without it. The project never changes; only the baseline does. Once competitors go digital, film declines whether Kodak moves or not.

Two minutes

Quick quiz

Score: 0 / 5

Curated by Prof. Shalini Velappan, IIM Trichy · LiFin Lab