BCOR 2200 Chapter 4 w cq

# BCOR 2200 Chapter 4 w cq - Chapter 4 Introduction to Time...

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1 Chapter 4 Introduction to Time Value of Money

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2 Chapter Outline: 4.1 Future Value and Compounding 4.2 Present Value and Discounting 4.3 More on PV and FV Key Concepts and Skills: 1. Be able to compute the future value of an investment made today 2. Be able to compute the present value of cash to be received at some future date 3. Be able to compute the return on an investment 4. Be able to compute the number of periods required for an investment to grow to certain amount given a growth rate 5. Learn the “Rule of 72’s”
3 Here is the Idea: Get \$100 today or Get \$100 in one year. Which is better? Obviously getting the \$100 today is better. Why? If you want to buy something today, you can. If you want to buy something in one year: You can lend the \$100 today for one year And have more than \$100 in one year So if I don’t get the money for one year, I need to get more than \$100 How much more? Talk about that in a soon!

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4 What we will do: Chapter 4: One Payment What is it worth today ( PV ) if we get one payment sometime in the future ( FV )? Given the FV , Calculate the PV What is a payment worth at some point in the future ( FV ) if we get the payment today ( PV )? So given the PV , Calculate the FV Later in Chapter 5: What if there are a whole bunch of payments?
5 The Notation: FV = PV(1+r) t OR PV = FV/(1+r) t FV = Future Value PV = Present Value r = The interest rate t = the number of periods (years) We will solve for each of these 4 variables If we have the other 3. And talk about what the variables mean

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6 4.1 Future Value and Compounding Future Value : What will a payment made today be worth later? Save \$100 for 1 year at 10% interest. What will we have in 1 year? t = 1 r = 10% PV = \$100 FV = ? In 1 year the FV = PV ( 1 + r) 1 = \$100(1.1) 1 = \$110 Save \$100 for 2 years at 10% interest Leave \$110 in bank for a second year: \$110(1.1) = \$121 \$100(1.1)(1.1) = \$100(1.1) 2 General Notation \$100(1 + r) t
Table 4.2 So \$100 in 5 years is worth \$100( 1.6105 ) = \$161.05 But nobody uses tables anymore! Use your calculator

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## This note was uploaded on 12/06/2010 for the course BCOR 2200 at Colorado.

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BCOR 2200 Chapter 4 w cq - Chapter 4 Introduction to Time...

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