Jan 18 - 1st Hour Definitions PV= Present Value FV= Future...

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01/18/2010 1 st Hour Definitions: PV= Present Value FV= Future Value PMT= Payment N= # of time periods i= interest rate, discount rate, compounding rate CF T = Cash flow at period T Time Value of Money- allows you to take a cash flow at one point in time and convert it to an equivalent value at another point in time. FVIF i,N = Future Value interest factor for single value PVIF i,N = Present Value interest factor for single value FVIFA i,N = Future Value interest factor for regular annuities PVIFA i,N = Present Value interest factor for regular annuities FV N =[PV][1+i] N FVIF i,N =[1+i] N FV N = [PV] [FVIF i,N ] PV N =[FV][1/(1+i)] N PVIF i,N =[1/(1+i)] N PV N =[FV][PVIF] Simple interest doesn’t take into account compounding effect of interest-on-interest. (1+i): The value of 1 maintains original amount. Invest early to capitalize on power of compounding. Make sure calculator is set to one period per year. N=number of periods I/Yr=interest rate per period PV=Present value PMT=payment per period FV=Future value
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FV increases with # of compounding periods and higher rates of return. PV and FV are reciprocal functions. PV decreases with # of compounding periods and higher rates of return. When using timelines to set up time value of money problems, remember that the tick marks are at the END of periods. Time 0 is today; Time 1 is the end of period 1(beginning of period 2) and so on. 01/18/2010 2nd Hour A regular annuity simply means that the payments are at the end of a period. An annuity due simply means that the payments are at the beginning of a period. A complex cash flow means that the payments are not a single or lump sum or that the payments are not an annuity. A mixture of uneven cash flows and even negative cash flows possibly. To find the future value of a complex cash flow, take each individual cash flow and compound it forward to the last period, then add the future values together. To find the present value of a complex cash flow, take each individual cash flow
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This note was uploaded on 02/07/2011 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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Jan 18 - 1st Hour Definitions PV= Present Value FV= Future...

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