Quick review of FINC 318 1. What is present value? How much you get now What is future value? How much what you get now grows to when compounded at a given rate What is interest rate? “Exchange rate” between earlier money and later money 2. Suppose you invest $1,000 for one year at 5% per year. What is the future value in one year? Suppose you leave the money in for another year. How much will you have two years from now? In 1 year: FV = PV (1+r) t = 1,000 * (1+0.05) = $1,050 In 2 years: FV = 1,050 * (1+0.05) = 1,000 * 1.05 2 = 1102.5 3. Your parents set up a trust fund for you 10 years ago that is now worth $19,671.51. If the fund earned 7% per year, how much did your parents invest? PV = FV / (1 + r) t = 19.671.51 / 1.07 10 = 10,000 4. You are offered an investment that will pay you $200 in one year, $400 the next year, $600 the next year and $800 at the end of the next year. You can earn 12 percent on very similar investments. What is the most you should pay for this one? NPV = 200/(1+0.12) + 400/(1+0.12)
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