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Chapter 5

# Chapter 5 - Chapter 5 The Time Value of Money The Time...

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Chapter 5 - The Time Value of Money The Time Value of Money Compounding and Discounting Single Sums We know that receiving \$1 today is worth more than \$1 in the future. This is due to opportunity costs . The opportunity cost of receiving \$1 in the future is the interest we could have earned if we had received the \$1 sooner. If we can measure this opportunity cost, we can: Translate \$1 today into its equivalent in the future (compounding). Translate \$1 in the future into its equivalent today (discounting). Compound Interest and Future Value Future Value - single sums If you deposit \$100 in an account earning 6%, how much would you have in the account after 1 year? Calculator Solution: P/Y = 1 I = 6 N = 1 PV = -100 FV = \$106 Mathematical Solution: FV = PV (FVIF i, n ) FV = 100 (FVIF .06, 1 ) (use FVIF table, or) FV = PV (1 + i) n FV = 100 (1.06) 1 = \$106 Future Value - single sums If you deposit \$100 in an account earning 6%, how much would you have in the account after 5 years? Calculator Solution: P/Y = 1 I = 6 N = 5 PV = -100 FV = \$133.82 Future Value - single sums If you deposit \$100 in an account earning 6%, how much would you have in the account after 5 years? Calculator Solution: P/Y = 1 I = 6 N = 5 PV = -100 FV = \$133.82 Future Value - single sums If you deposit \$100 in an account earning 6%, how much would you have in the account after 5 years?

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Chapter 5 - Chapter 5 The Time Value of Money The Time...

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