Ch. 2 Self Test Problems

# Ch. 2 Self Test Problems - Self Test P roblems 2.1 Periods...

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Self Test Problems 2.1 - Periods are often years, but can also be quarters or months or even days. - Time line T=0 4% Year 1 Year 2 Year 3 PV = \$2,000 \$2,080 \$2,163.20 \$2,249.73 FV(1) = PV + INT FV (1) = PV(1+I) FV(1) = \$2000 +\$2000(1+ .04) FV(1) = \$2,080 2.2 - A dollar in hand today is worth more than a dollar to be received in the future because, if you had it now, you could invest it, earn interest, and end up with more than a dollar in the future. - Compounding – the process of going to future values from present values. 10% Year 1 Year 2 Year 3 Year 4 Year 5 PV = \$100 \$110 \$121 \$133.10 \$146.41 \$161.05 - PV = 2000 If I = 5% If I = 6% If I =20%

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N = 3 FV = \$2,315.25 FV = \$2,382.03 FV = \$3,456.00 I = 4% FV = \$2,249.73 - PV = \$100 million N = 10 I = 8% FV = \$215.89 - PV = \$ 1.00 If I =10% N = 100 FV = \$13,780.61 I = 5% FV = \$131.50 2.3 - Discounting is the reverse of Compounding; if you know the PV you can then find the FV. FV = PV (1+I)^N
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Ch. 2 Self Test Problems - Self Test P roblems 2.1 Periods...

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