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Chapter3

# Chapter3 - FIN3100 Chapter 3 Time Value of Money Part 1...

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FIN3100: Chapter 3 Time Value of Money: Part 1

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Learning Objectives Calculate future values and understand compounding. Calculate present values and understand discounting. Calculate implied interest rates and waiting time from the time value of money equation.
Definitions Present Value – value today (so earlier money on a time line) Future Value – value in the future (so later money on a time line) Interest rate – “exchange rate” between earlier money and later money Discount rate Cost of capital Opportunity cost of capital Required return

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Future Value: Single-Period Scenario FV = PV(1 + r) n FV = future value PV = present value r = period interest rate, expressed as a decimal n = number of periods Future value interest factor = (1 + r) n or FVIF n, r in Table on page 570.
Example Example 1: Let’s say John deposits \$200 for a year in an account that pays 6% per year. At the end of the year, he will have: FV = \$200 + (\$200 x .06) = \$212 = \$200(1.06) = \$212

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Example continued Example 2: If John closes out his account after 3 years, how much money will he have accumulated? How much of that is interest-on-
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