newnansm3 - Chapter 3 Interest and Equivalence 3-1 Time...

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Chapter 3: Interest and Equivalence 3-1 Time value of money means ‘money has value over time.’ Money has value, of course, because of what it can purchase. However, the time value of money means that ownership of money is valuable, and it is valuable because of the interest dollars that can be earned/gained due to its ownership. Understanding interest and its impact is important in many life circumstances. Examples could include some of the following: Selecting the best loans for homes, boats, jewellery, cars, etc. Many aspects involved with businesses ownership (payroll, taxes, etc.) Using the best strategies for paying off personal loans, credit cards, debt Making investments for life goals (purchases, retirement, college, weddings, etc.) Etc. 3-2 It is entirely possible that different decision makers will make a different choice in this situation. The reason this is possible (that there is not a RIGHT answer) is that Magdalen, Miriam, and Mary all could be using a different discounting rate (interest rate or investment rate) as they consider the choice of $500 today versus $1,000 three years from today. We find the interest rate at which the two cash flows are equivalent by:
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This note was uploaded on 08/13/2010 for the course IME IME 314 taught by Professor Freeman during the Spring '10 term at Cal Poly.

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newnansm3 - Chapter 3 Interest and Equivalence 3-1 Time...

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