Lecture6 - Define present value, future value, and interest...

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Unformatted text preview: Define present value, future value, and interest rate. You know the payment amount for a loan, and you want to know how much was borrowed. Do you compute a PV or a FV? What is the difference between simple interest and compound interest? What is the relationship between: PV & FV, FV (PV) & interest rate, FV(PV) & number of periods? Quick Quiz Eco 635.02 Prof. Zhylenko 1 Lecture 6 Discounted Cash Flow Valuation Eco 635.02 Prof. Zhylenko 2 Multiple Cash Flows - FV Ways to calculate future values for multiple cash flows: 1. Compound the accumulated balance forward one year at a time 2. Calculate the future value of each cash flow first and then add them up Eco 635.02 Prof. Zhylenko 3 Multiple Cash Flows FV Example 1 Find the future value of $5000 invested at the end of each of the next 5 years. The current balance is zero, and the rate is 10%. 1. Compounding forward one period at a time Today (year 0): FV = 0(1.1) = 0 Year 1: FV = 5000(1.1) = 5500 Year 2: FV = (5500 + 5000)(1.1) = 11550 Year 3: FV = (11550 + 5000)(1.1) = 18205 Year 4: FV = (18205 + 5000)(1.1) = 25525.5 Year 5: value = 25525.5 + 5000 = 30525.5 Eco 635.02 Prof. Zhylenko 4 Multiple Cash Flows FV Example 1 Continued 2. Calculating the future value of each cash flow and adding them up Today (year 0): FV = 0(1.1) 5 = 0 Year 1: FV = 5,000(1.1) 4 = 7320.5 Year 2: FV = 5,000(1.1) 3 = 6655 Year 3: FV = 5,000(1.1) 2 = 6050 Year 4: FV = 5,000(1.1) 1 = 5500 Year 5: Value = 7320.5 + 6655 +6050 + 5500 + 5000 = = 30525.5 Eco 635.02 Prof. Zhylenko 5 Suppose you invest $400 in a mutual fund...
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This note was uploaded on 03/17/2010 for the course ECON 365 taught by Professor Svitlanazhylenko during the Spring '10 term at CUNY Hunter.

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Lecture6 - Define present value, future value, and interest...

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