Unformatted text preview: Future Value measures the nominal “worth” of money at a predetermined point in the future (nominal: measuring in amount and not in “real value’ —real value being the
amount’s worth in present time). Initial Income: 42,000 (per year) Time: 42 (years) Rate (of growth): 2.5 (percent per year, .025)
The rate at which income may grow can depend on many factors and namely
those which the employer takes into account. For this example we will choose
a static growth rate of 2.5 percent which is close to the average inﬂation rate over
the last several years. However, it’s important to remember that inﬂation varies
depending on market cycles and other factors. Thus, an accurate representation
of money growth depending on a single factor such as inﬂation can be much more
complicated. FV = Initial Value + Initial Value * (1 + r) + Initial Value * (1+r)"2 + ......
.....+ Initial Value * (I+r)"t Note: This equation is for a compounding interest rate. For a simple interest rate
it would simply be Initial Value * (1+rt). FV = 42,000 + 42,000 * (1+.025) + 42,000(1.025)02+. . ...+42,000(1.025)"t
= z 42,000*(1+.025)"l< (ﬁom kzo to k=42) Which is approximately equal to 3,177,754 (plugged into calculator). Present Value is the measure of the worth of future payment’s discounted for the time
value of money for a given date (usually now, however this formula is
sometimes used to calculate other given points in time). Same parameters as above. Interest rate: Case 1: .05 (5 percent) Case 2: .12 (12 percent)
The interest rate used is the discounted value of the money. Like the rate of
growth, the discounted value tends to change over time and can include many
factors such as inﬂation, risk, etc. Thus, it is often much more complicated than
this watered down version. PV =—* Initial Value + Initial Value * (1 + r)l(1+i) + Initial Value * (1+r)"2/(1+i)"2
+ ........... + Initial Value * (1+r)"tl(l+i)"t. PV(1) = 42,000 + 42,000 * (1+.025)/(1+.05) + 42,0000.025)A2/(1+.05)02+.. ...+
42,000(1.025)At/(1+.05)At
= z 42,000*(1+.025)"k/(1+.05)"k (from k=0 to k=42) Which is approximately equal to 1,13 8,128. ...
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 Fall '07
 KAMRANY

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