Ch17A-8e_micro

Ch17A-8e_micro - APPENDIX 17 Present Value and Discounting...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Present Value and Discounting APPENDIX 17
Background image of page 1

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

View Full DocumentRight Arrow Icon
After studying this appendix, you will be able to Explain how to calculate the present value of a future amount of money Explain how a firm uses a present value calculation to make an investment decision Explain the relationship between present value and the interest rate
Background image of page 2
Comparing Current and Future Dollars Discounting is converting a future amount of money into a present value. The present value of a future amount of money is the amount that, if invested today, will grow to be as large as that future amount when the interest that it will earn is taken into account. The easiest way to understand discounting is to consider how a present value grows to a future amount of money because of compound interest .
Background image of page 3

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

View Full DocumentRight Arrow Icon
Comparing Current and Future Dollars Compound Interest Compound interest is the interest on an initial investment plus the interest on the interest that the investment has previously earned. Because of compound interest, a present amount of money (a present value) grows into a larger future amount. Future amount = Present value + Interest income
Background image of page 4
Comparing Current and Future Dollars If the interest rate is r per year, then the amount of money a person has one year in the future is Amount after I year = Present value + (
Background image of page 5

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

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 17

Ch17A-8e_micro - APPENDIX 17 Present Value and Discounting...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online