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Appendix 3 – Objectives
•
Describe the difference between simple and compound
interest
•
Describe the meaning of the future value of an amount
(FV) and the future value of an ordinary annuity (FVA)
•
Describe the meaning of the present value of an amount
(PV) and the present value of an ordinary annuity (PVA)
•
Describe the relationship between the present value of an
amount (PV) and the future value of an amount (FV)
•
Calculate the future value and present value of an
investment
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Financing Decisions
Investment by owners
Loans from creditors
Business capital
(Funding)
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LongTerm Investing/Financing
•
Focus
–
Cash Flows
–
Time Value of Money
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The Rule of 72
•
A rule that states in order to find the number of years required to double your
money at a given interest rate, you divide the compound interest rate into 72.
–
The result is the
approximate number of years
that it will take for your
investment
to double
.
•
For example:
–
$1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into $2.
–
In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2).
•
Albert Einstein is often credited with discovering the compound interest Rule of 72.
–
Referring to compound interest, Albert Einstein is quoted as saying:
–
"It is the greatest mathematical discovery of all time“.
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Time Value Of Money
•
A dollar on hand today is worth more than a dollar to be received in the future
–
The dollar on hand today can be invested to earn interest to yield more than a
dollar in the future
.
–
This, of course, depends upon the rate of return or interest rate which can be
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This note was uploaded on 03/10/2011 for the course ACC 210 taught by Professor Staff during the Spring '07 term at N.C. State.
 Spring '07
 STAFF

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