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Chapter 2 Summary

# Chapter 2 Summary - Chapter 2 Summary Basic Business...

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Chapter 2 Summary Basic Business Finance 2/25/08 Chapter 2 Summary Time Value of Money Time Lines A time line is an important tool used in time value analysis. It is used to show the timing of cash flow. Future Values Future value (FV) is the amount to which a cash flow or series of cash flows will grow over a given time period of time when compounded at a given interest rate. Present value (PV) is the value today of a future cash flow or series of cash flows. Compounding is the arithmetic process of determining the final value of cash flow or series of cash flows when compound interest is applied. Compounding is the process of going to future of values to present values. Step-by-Step Approach You multiply the initial amount and each succeeding amount by (1+I). This approach is useful to show exactly what is happening, but it can be rather time consuming. Compound interest occurs when interest is earned on prior periods interest. Simple interest occurs when interest is not earned on interest.

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Formula Approach FV N =PV(1+I) N Financial Calculators They are extremely helpful when working with time value problems. There are five keys that correspond with working one of the time value problems. N- is the number of periods. I/YR- is the interest rate per period. Some calculators use i or I instead.
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