S07 Chap 3-2

# S07 Chap 3-2 - EconomicEquivalence Chapter 3-2 Contemporary...

This preview shows pages 1–7. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Economic Equivalence What do we mean by “economic equivalence?” Why do we need to establish an economic equivalence? How do we establish an economic equivalence?
Economic Equivalence Economic equivalence exists between cash flows that have the same economic effect and could therefore be traded for one another. Even though the amounts and timing of the cash flows may differ, the appropriate interest rate makes them equal.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
If you deposit P dollars today for N periods at i , you will have F dollars at the end of period N . N F P 0 N i P F ) 1 ( + = Equivalence from Personal Financing  Point of View P F
F dollars at the end of period N is equal to a single sum P dollars now, if your earning power is measured in terms of interest rate i . N F P 0 (1 ) N P F i - = + Alternate Way of Defining Equivalence N 0 =

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Practice Problem 0 1 2 3 3 4 5 \$2,042 5 F 0 At an 8% interest, what is the equivalent worth of \$2,042 now in 5 years?
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern