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Supplement
J
Financial Analysis
A. Time Value of Money
1.
Underlying concept
2.
Future value of an investment
a.
Compounding interest
b.
Future value of an investment
c.
Formula
F = P(
1
+r)
n
where
F
=
P
=
r
=
n
=
d.
Application J.1: Future Value of an Investment
An investment of $500 will earn interest of 6%, compounded annually for 5 years.
The future value is:
F = P(
1
+r)
n
where
P
=
r
=
n
=
F
=
3.
Present value of a future amount
a.
Present value of a future amount
b.
Discounting
c.
The general formula is:
(
29
1
n
F
P
r
=
+
d.
Present value factors (pf)
•
To find the present value of a
future amount, write the above formula as:
SN:J1
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View Full Document SN:J2
Supplement J: Financial Analysis
(
29
1
1
n
P
F
r
=
+
•
Multiply
F
by the present value factor (pf).
e.
Application J.2: Present Value of a Future Amount
An investment will be worth $500 in 5 years. The interest rate is 6%. The present
value is:
(
29
1
n
F
P
r
=
+
F
=
r
=
n
=
P
=
Solving instead using present value factor (pf) from the table:
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This note was uploaded on 12/19/2009 for the course MANAGEMENT 00123 taught by Professor Ahmed during the Spring '09 term at Albany College of Pharmacy and Health Sciences.
 Spring '09
 ahmed
 Management

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