Exam 2 Review

# Exam 2 Review - Chapter 5 1 Time value of money is the...

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Chapter 5 1. Time value of money is the difference in value between a dollar in had today and a dollar promised in the future; a dollar today is worth more than a dollar in the future. Most people would prefer to have goods today rather than later. 2. Lump Sum- Oriented Problems: FV= PV*(1+i)^n & PV=FV/(1+i)^n FV= Future Value PV= Present Value i= Interest Rate n=number Future value problems typically measure the value of cash flows at the end of a project, whereas present value measures the value of cash flows at the start of a project (time zero). Rule of 72 TDM=72/I i=72/# of time to double Lump sum relationships As interest rates increase (decrease), present values decrease (increase). As interest rates increase (decrease), future values increase (decrease). As the number of periods increases (decreases), PV’s decrease (increase). As the number of periods increases (decreases), FV’s increase (decrease).

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