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Basic Tools of Finance

# Basic Tools of Finance - The Basic Tools of Finance Net...

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The Basic Tools of Finance: Net Present Value Present Value: the amount of money today that is equivalent to a given amount of money in the future Future Value: how much a given amount of money will be worth in the future Like we have to adjust money for inflation, we have to adjust money for the time frame (when it is received) FORMULAS: r the interest rate (example 5%) N number of years (example 15 years) X amount of money Present value of getting X \$ in N years is: X / (1 + r) N Future value of X \$ today in N years will be: X * (1 + r) N What value do you use for N? I owe you money today (N = 0) I owe you money 365 days from now (N = 1) I owe you money 1 year and 1 day from now (N = 1) I owe you money 2 years from now (N = 2) Example You are offered two jobs (each pays salary at beginning of the year) Job #1 pays a low training salary (\$20,000) for 2 years but then in 3 rd year a high salary (\$80,000). Total pay \$120,000. Job #2 pays a medium salary (\$40,000) for all 3 years. Total pay \$120,000. Which is a better deal financially at an 8% interest rate? Present Value Job #1 = \$20,000/1 + 20,000/1.08 + 80,000/1.08

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