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time value of money

# time value of money - Company LOGO Time Value of Money...

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Company LOGO Time Value of Money

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Agenda Concepts & Applications Annuities Present Value of a Perpetuity PV / FV of Uneven Cash flows
Concept/Applications TVM Compound Interest Present Value Future Value Which would you rather have -- \$1,000 today or \$1,000 in 5 years? TIME VALUE OF MONEY !!

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Money received NOW = funds for investment TIME = opportunity to postpone consumption and earn INTEREST . Opportunity cost = not earning interest on money
TVM variables PMT (Annuity payments/ periodic cash flows) N ( # of compounding periods ) i ( interest rate/ compounding period) PV (Present Value) FV (Future Value)

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Future Value Example You want to know how large a \$5,000 deposit will become at an annual compound interest rate of 8 % at the end of 5 years . 0 1 2 3 4 5 \$5,000 FV 5 i = 8%
Solution formula: FVn = PV (1+i)n FV = \$5,000 (1+ 0.08)5 = \$7,346.64

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Present Value You need to know how large of a deposit to make today so that the money will grow to \$2,500 in 5 years. Assume today’s deposit will grow at a compound rate of 4% annually.
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