Notes on Present Value etc

# Notes on Present - Notes on Present Value(PV Future Value(FV Compounding and Discounting Assume an opportunity cost of capital r of 4 p.a Future

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Notes on Present Value (PV), Future Value (FV), Compounding and Discounting Assume an opportunity cost of capital, r, of 4% p.a. Future Value: What is \$100 worth at a future date (time t)? Present Value Time t = 0 Future Value t = 1 Year Future Value t = 2 Years Future Value t = 3 years Future Value t = 4 years \$100 100(1 + .04) = 104 PV(1 + r) 104(1 + .04) = 108.16 PV(1 + r) 2 108.16(1 + .04) = 112.49 PV(1 + r) 3 112.49(1 + .04) = 116.99 PV(1 + r) 4 Future Value Factor (FV/PV) (1 + r) 1.04 (1 + r) 2 1.086 (1 + r) 3 1.1249 (1 + r) 4 1.1699 Notice that we are compounding interest, i.e. the interest earned each year is reinvested in succeeding years. Generally: FV = PV (1 + r) t //home/vdimitrov/18633/d6eb9f50c8512dfa330829cac775f641d8dc7fd6.doc 1 of 4

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Present Value: What is \$100 payable at time t worth today? One way to look at this question is to let the answer be x , i.e. x is the present value of the \$100 to be paid at a future date. From what we did above, we know that x (1 + r) t = 100, where x is the Present Value and \$100 is the Future Value. x
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## This note was uploaded on 11/02/2011 for the course FIN 320 taught by Professor Staff during the Fall '08 term at Ill. Chicago.

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Notes on Present - Notes on Present Value(PV Future Value(FV Compounding and Discounting Assume an opportunity cost of capital r of 4 p.a Future

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