CHAPTER 5

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

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Unformatted text preview: Opportunity cost of lost income from investments &#2; Cost of deferring consumption &#2; Inflation Moving sums of money through time WITHOUT CHANGING ITS RELATIVE EQUIVALENCY &#2; Moving forward – COMPOUNDING – FUTURE VALUE &#2; 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%? &#2; Year 1 = 1000 + 1000*1.10 = \$1100 &#2; Year 2 = 1100 + 1100*1.10 = 1210 &#2; Year 3 = 1210 + 1210*1.10 = 1331 &#2; SUMMARIZE = FVn = PV(1+i) n &#2; 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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