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Ch17A - APPENDIX 1 7 Present Value and Discounting After...

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Present Value and Discounting APPENDIX 17
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After studying this appendix, you will be able to Explain how to calculate the present value of a future amount of money Explain how a firm uses a present value calculation to make an investment decision Explain the relationship between present value and the interest rate
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Comparing Current and Future Dollars Discounting is converting a future amount of money into a present value. The present value of a future amount of money is the amount that, if invested today, will grow to be as large as that future amount when the interest that it will earn is taken into account. The easiest way to understand discounting is to consider how a present value grows to a future amount of money because of compound interest .
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Comparing Current and Future Dollars Compound Interest Compound interest is the interest on an initial investment plus the interest on the interest that the investment has previously earned. Because of compound interest, a present amount of money (a present value) grows into a larger future amount. Future amount = Present value + Interest income
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Comparing Current and Future Dollars If the interest rate is r
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