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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.
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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.
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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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