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TVM_NOTES - FINANCE 300 SPRING 2010 Time Value of Money...

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FINANCE 300 Time Value of Money SPRING 2010 Chapter 4 One of the Principles of Finance is Time Value of Money. Money does have time value. A dollar today is worth more than a dollar to be received in the future. We can measure this value and it is very important in many business decisions. Use time lines to present visually the problem. TVM Problems: Basically there are 3 known values and you are finding the unknown. Variables: FV: Future Value FVA: Future Value of an Annuity FVAD: Future Value of an Annuity Due PV: Present Value PVA: Present Value of an Annuity PVAD: Present Value of an Annuity Due i = g : Interest Rate or Growth Rate PMT: Annuity n: Time Period m: Times compounding per year FUTURE VALUE: What a dollar, an annuity or a mixed stream will grow to for a specified time at a specific interest rate. COMPOUNDING: Interest becomes principle. FUTURE VALUE OF A LUMP SUM FV = PV ( 1 + i ) n a. If you deposited $1,000 in a 5% interest barring account for 5 years, what would be its future value? FV = 1,000 (1.05) ^ 5 FV = $1,276.28 CALCULATOR : (ALWAYS MAKE SURE FINANCE REGISTER IS CLEARED AND CF IS SET ON 1 PAYMENT PER YEAR, (COLOR/ g & P/YR)) -1000 PV, 5 n, 5 i ASK FOR IT TO SOLVE FOR FV: ANSWER 1,276.28 FUTURE VALUE OF AN ANNUITY
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