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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View Full DocumentN = 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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 Fall '09
 Dr.Moon
 Corporate Finance

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