Chapter+04[1]

Chapter+04[1] - 4-1Basic DefinitionsPresent Value (PV)The...

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Unformatted text preview: 4-1Basic DefinitionsPresent Value (PV)The current value of future cash flows discounted at the appropriate discount rateValue at t=0 on a time lineFuture Value (FV)The amount an investment is worth after one or more periods.Later money on a time line4-2Basic DefinitionsInterest rate(r)Discount rateCost of capitalOpportunity cost of capitalRequired returnTerminology depends on usage4-3Future Values: General FormulaFV = PV(1 + r)tFV = future valuePV = present valuer = period interest rate, expressed as a decimalt = number of periodsFuture value interest factor = (1 + r)tNote: yx key on your calculator4-4Effects of CompoundingSimple interest Interest earned only on the original principalCompound interestInterest earned on principal and on interest receivedInterest on interest interest earned on reinvestment of previous interest paymentsReturn to Quiz4-5Future Values ExampleSuppose you invest the $100 from the previous example for 5 years. How much would you have?Formula Solution:FV=PV(1+r)t=100(1.10)5=100(1.6105)=161.05Keystrokes: 1.1 ;5 <N100 N161.05104-6Table 4.14-7Figure 4.24-8Present ValuesThe current value of future cash flows discounted at the appropriate discount rateValue at t=0 on a time lineAnswers the questions:How much do I have to invest today to have some amount in the future?What is the current value of an amount to be received in the future?Present Value = the current value of an amount to be received in the future4-9Present ValuesFV = PV(1 + r)tRearrange to solve for PV PV = FV / (1+r)tPV= FV(1+r)-tDiscounting = finding the present value of one or more future amounts....
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Chapter+04[1] - 4-1Basic DefinitionsPresent Value (PV)The...

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