# 4.2 - The Time Value of Money Part 2 1 FUTURE VALUE...

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1 The Time Value of Money Part 2

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2 FUTURE VALUE COMPOUNDING
3 Future Value Lump Sum When we think of future value we think of  determining the value at a distant date of an  amount to be paid at a near date. Year 0 1 2 3 4 | | | | | Value Future Value

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4 Future Value Lump Sum The expression for future value: FV n  = value  n  periods in the future r    = the ‘per period’ interest rate PV  = present value n    = the number of periods n n r PV FV ) 1 ( + × =
5 Future Value FACTOR The future value factor (also called a  compound  interest factor ) is the expression: It can be calculated directly on a calculator or  spreadsheet or determined from the  Appendix, Exhibit  A-1, page 464  of your course text. n r ) 1 ( +

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6 1 . . . . 1.010 1.020 1.030 1.040 1.060 1.080 1.100 2 . . . . 1.020 1.040 1.061 1.082 1.124 1.166 1.210 3 . . . . 1.030 1.061 1.093 1.125 1.191 1.260 1.331 4 . . . . 1.041 1.082 1.126 1.170 1.262 1.360 1.464 5 . . . . 1.051 1.104 1.159 1.217 1.338 1.469 1.611 10 . . . . 1.105 1.219 1.344 1.480 1.791 2.159 2.594 20 . . . . 1.220 1.486 1.806 2.191 3.207 4.661 6.727 An expanded table is presented in the Appendix, Exhibit A-1, page 464 Future value of \$1 (FV IF ) Periods 1% 2% 3% 4%     6%     8%   10% PPT 9-6
7 If prevailing interest rates are 8%, how much do  you have in 9 years if you invest \$10,000 today? FV = PV X (FV IF  n=9,  r  =8%)         = \$10,000 X 1.999 = \$19,990  NOTE: RULE OF 72

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8 PRESENT VALUE DISCOUNTING
9 Present Value Lump Sum When we think of present value we think of  determining the value at a near date of an  amount to be paid at a distant date.   Year 0 1 2 3 4 | | | | | Value Present Value

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10 Present Value Lump Sum The expression for present value: PV  = present value r    = the ‘per period’ interest rate FV n  = value  n  periods in the future n    = the number of periods n n r FV PV ) 1 ( 1 + =
11 Present Value FACTOR The present value factor (also called the discount factor)  is the expression: It can be calculated directly on a calculator or  spreadsheet or determined from the table on  Appendix,  Exhibit A-3, page 466  of your course text. n r ) 1 ( 1 +

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12 1 .. . . . 0.990 0.980 0.971 0.962 0.943 0.926 0.909 2 .. . . . 0.980 0.961 0.943 0.925 0.890 0.857 0.826 3 .. . . . 0.971 0.942 0.915 0.889 0.840 0.794 0.751 4 .. . . . 0.961 0.924 0.888 0.855 0.792 0.735 0.683 5 .. . . . 0.951 0.906 0.863 0.822 0.747 0.681 0.621 10 . . . . . 0.905 0.820 0.744 0.676
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4.2 - The Time Value of Money Part 2 1 FUTURE VALUE...

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