L05 Time Value of Money - Time Value of Money Present and...

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    Time Value of Money Present and Future Value of a Lump  Sum Annuities Perpetuities 
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    Time Value Money held as cash decreases in value  over time. The time frame of investment decisions  must be examined to determine the true  value of the “payout”
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    Compounding The process of going from today’s value  or  present value   (PV)  of a lump sum of  cash . . . .  . . . . to the  future (FV) value  at some  forthcoming time period n periods or  years from now.
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    Compounding The key is that interest is paid on the  original lump sum (the principal)  simple interest  and on the interest paid over time compound interest
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    Lump Sum Comparisons:  Future value Future Value-  the value of a lump sum after  it has been invested for one or more periods  of time. t r PV FV ) 1 ( * + =
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    Examples  $5,000 invested today r = 8% In one year FV = 5000 x 1.08 = $5,400 In ten years FV = 5000 x (1.08)^10 = $10,794.62
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    Future Value of a Lump Sum t r PV FV ) 1 ( * + = FV with growths from -6% to +6% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 0 2 4 6 8 10 12 14 16 18 20 Years Future Value of $10 6% 4% 2% 0% -2% -4% -6%
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    Example:  Future Value of a  Lump Sum Your bank offers a  CD with an interest 
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This note was uploaded on 04/17/2009 for the course KINS 4520 taught by Professor Maxcy during the Spring '09 term at University of Georgia Athens.

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L05 Time Value of Money - Time Value of Money Present and...

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