Fv is the future value or the value at a future date

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: uation). 2 Notation 0 PV 1 2 3 t ... FV • • • • Consider the time line above: PV is the Present Value, that is, the value today. FV is the Future Value, or the value at a future date. The number of time periods between the Present Value and the Future Value is represented by “t” or “n”. • The rate of interest is called “r” or “i”. • All time value questions involve the four values above: PV, FV, r, and t. Given three of them, it is always possible to calculate the fourth. • Timing of cashflows: end of period unless otherwise specified. Future Value for a Lump Sum • Assuming that the interest rate is 10%, how much will you get after one year, if you invest $100 today? • Notice that – 1. $110 = $100 × (1 + .10) – 2. $121 = $110 × (1 + .10) = $100 × 1.10 × 1.10 = $100 × 1.102 – 3. $133.10 = $121 × (1 + .10) = $100 × 1.10 × 1.10 × 1.10 = $100 × ________ Future Value for a Lump Sum • In general, the future value, FVt, of $P invested today at r% for t periods is FVt = $P × (1 + r)t = $P × FF(r,t) • The expression (1 + r)t is the future value interest factor, denoted by FF(r,t). 3 Example: Simple Future Value • Suppose that you want to find the future value, as of 10 years from now, of $200 paid today. The interest rate r is 4%. Present Value for a Lump Sum • In general, the present value, PVt, of $P to be received in t periods when the rate is r is PV = $P/(1 + r )t • The expression 1/(1 + r)t is the present value interest factor. Example: Simple Present Value • Suppose that the interest rate is r = 7% and you want to compare the following two plans: A: Receive $300 4 years from now B: Re...
View Full Document

This note was uploaded on 01/17/2011 for the course MGMT 107 taught by Professor ? during the Winter '08 term at UC Irvine.

Ask a homework question - tutors are online