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Unformatted text preview: Finance 310 Prof. Gamble TIME VALUE OF MONEY CONTINUED Goals: Understand the time value of money. Be able to calculate the value of money at different points in time. Use time value of money calculations to make smart financial decisions. Reading: Chapters 4 and 5: The Time Value of Money and Interest Rates Rules for Valuing Cash Flows at Different Points in Time Rule 1: Compare or combine values only at the same point in time. (A dollar today and a dollar in one year are not equivalent.) Rule 2: To calculate a cash flow's future value, you must compound it. Rule 3: To calculate the value of a future cash flow at an earlier point in time, you must discount it. There are multiple strategies to solve time value of money problems, but all must follow the three rules above. Example: You deposit $1,000 now, $2,000, in one year, and $3000 in two years into a savings account earning 3% interest each year. How much will you have in your account in three years?...
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