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J
Financial Analysis
A. Time Value of Money
1.
Underlying concept of time value of money.
2.
Future value of an investment
a.
Compounding interest is the process by which interest on an investment
accumulates, and then earns interest itself for the remainder of the investment
period.
b.
Future value of an investment is the value of an investment at the end of the
period over which interest is compounded.
c.
Calculating the future value of an investment requires that the interest rate and
the investment time period are expressed in the same units of time as the interval
at which compounding occurs. The formula is:
(
29
1
n
F
P
r
=
+
where
F
= future value of the investment at the end of
n
periods
P
= amount invested at the beginning, called the principal
r
= periodic interest rate
n
= number of time periods for which the interest compounds
d.
Future Value of an Investment
.
Use
Application J.1
3.
Present value of a future amount
a.
Present value of an investment is the amount that must be invested now
to accumulate to a certain amount in future at a specified interest rate.
b.
Discounting is the process of finding the present value of an investment, when
the future value and the interest rate are known. The general formula is:
(
29
1
n
F
P
r
=
+
c.
The interest rate,
r
,
is also called the discount rate.
d.
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 Spring '09
 ahmed
 Management

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