BCOR 2200 Chapter 4

BCOR 2200 Chapter 4 - Chapter 4 Introduction to Time Value...

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1 Chapter 4 Introduction to Time Value of Money
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2 Chapter Outline: 4.1 Future Value and Compounding 4.2 Present Value and Discounting 4.3 More on PV and FV Key Concepts and Skills: Be able to compute the future value of an investment made today Be able to compute the present value of cash to be received at some future date Be able to compute the return on an investment Be able to compute the number of periods required for an investment to grow to certain amount given a growth rate Learn the “Rule of 72’s”
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3 The Basic Formula: FV = PV(1+r) t FV = Future Value PV = Present Value r = The appropriate periodic rate Usually an annual rate t = the number of periods Usually years, but must be consistent with r We will solve for each of these variables
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4 4.1 Future Value and Compounding Future Value: Save $100 for 1 year at 10% interest t = 1 r = 10% PV = $100 In 1 year the FV is $110 = 100(1.1) 1 More than 1 period (for example, 2 periods): Leave $110 in bank for a second year: $110(1.1) = $121 $100(1.1)(1.1) = $100(1.1) 2 General Notation $100(1 + r) t (1 + r) t is called Future Value Interest Factor
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Table 4.2 So $100 in 5 years is worth $100( 1.6105 ) = $161.05 This is equal to $100(1.10) 5 = $161.05 But nobody uses tables anymore! Use your calculator
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BCOR 2200 Chapter 4 - Chapter 4 Introduction to Time Value...

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