CHAPTER 5 - Opportunity cost of lost income from...

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Unformatted text preview: Opportunity cost of lost income from investments  Cost of deferring consumption  Inflation Moving sums of money through time WITHOUT CHANGING ITS RELATIVE EQUIVALENCY  Moving forward COMPOUNDING FUTURE VALUE  Moving backward DISCOUNTING PRESENT VALUE ASSUMPTION OF COMPOUNDING ALL CASH FLOWS ARE REINVESTED AT THE SAME RATE AS THE ORIGINAL INVESTMENT PV = Present Value (time zero) FV = Future Value PMT = Annuity Payments i = annual rate of interest (increase) N = number of years of compounding/discounting i/y = annual rate of interest CF = Cash Flow (of particular period) Lump Sum how much will $1000 invested today in an account that pays an annual interest rate of 10%?  Year 1 = 1000 + 1000*1.10 = $1100  Year 2 = 1100 + 1100*1.10 = 1210  Year 3 = 1210 + 1210*1.10 = 1331  SUMMARIZE = FVn = PV(1+i) n  FV = 1000(1.10) 3 = 1331 Financial Calculator: Enter what you know compute what want to know 1000 hit PV 3 hit n 10 hit I/Y Hit CPT hit FV Compute Periodic Rate = Nominal or annual rate/number of compounding periods per year Compute M = number of compounding periods Example: 10% nominal rate, semi-annual compounding: i/y = 10/2 = 5%; M = 3X2 = 6. Solve like before 1000=PV; 6=n; 5=i/y CPT FV answer 1340.10 WHY HIGHER VALUE????...
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CHAPTER 5 - Opportunity cost of lost income from...

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