Note 2-11~ 2-13-08 - Discount Factor – PV of a $1 future...

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Note 2/11/2008 Bus 170 CH4 Time Value of Money Simple Interest – interest earned on only your original interest Compound Interest – interest earned on principle + interest earned Future Value (FV) – Amount to which the investment will grow FV = $100 X (1+r) ^t 2/13/2008 CH4 Continue Present Value (PV) – value today of a future cash flow / payment PV = FV / (1+r) ^t Example: 3000 payment in 2 years 8% interest 3000 / (1+.08)^2 = 2572 Discount Rate – Interest rate used to compute PV of future cash flows / payments
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Unformatted text preview: Discount Factor – PV of a $1 future payment DF = 1 / (1+r)^t Multiple Cash flow Choice to pay $15,500.00 (now) Or 3 Payments of: $8,000 (now) $4,000 (end of year 1) $4,000 (end of year 2) Cost of year $ (interest) – 8% Never compare cash flows occurring at different times!!!!! Discount them to the present!!!!! PV = $8000+3703.70+3429.36 PV = $15,133.06 Therefore the second choice is better than the first choice...
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