Understanding TVM

# Understanding TVM - Variable Definitions Present value(PV =...

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Understanding TVM TVM tells us that: 1) If we invest money today, we will be repaid more money in the future. 2) If we expect to receive some payment in the future, we can trade it for a smaller payment today. Rule of thumb: "A dollar today is worth more than a dollar tomorrow." Or, conversely: A dollar today, can be traded for more than one dollar tomorrow. The important question is, " How much more?" Simple Interest Interest rate and dollar amount of interest payments are constant over time. Ex: You invest money in a savings account, and it pays out the same amount every year. Interest accrues on the principal invested but not on past interest earned. Simple interest formula: FV = PV × (1 + r × t)
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Unformatted text preview: Variable Definitions Present value (PV) = cash flow at beginning of investment period (not always today). Future value (FV) = cash flow at end of investment period (not always in the future). Interest rate (r) = percentage return per period. Number of periods (t) = total amount of time that money was invested. Ex. 4: Simple Interest You invest \$100 in a savings account earning 10% in simple interest. How much money is in your account after 1 year? 2 years? 5 years? 10 years? FV 1 = PV×(1+r×t) = 100×(1+0.10×1) = \$110 FV 2 = PV×(1+r×t) = 100×(1+0.10×2) = \$120 FV 5 = PV×(1+r×t) = 100×(1+0.10×5) = \$150 FV 10 = PV×(1+r×t) = 100×(1+0.10×10) = \$200...
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