1 - t Four variables: FV, PV, r, t, given any 3 you can...

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Chapter 4: Time value of money: Key definitions: Future value  is the amount a sum, of money grows to as, it earns  interest over a period Annuity:  a series of regular and constant cash flow for a period. Perpetuity:  an annuity where cash flows continue forever.    Effective annual rate (EAR):  The interest rate as if it were  compounded once per time period rather than several times per  period. Future value*Value of a sum after investing it over one or  more periods. Also called compound value. Key knowledge: Compound interest: If you invest at an interest rate of r per year for t years, the future  value per £ invested is, (1 +r) x (1 + r) x….x (1 + r) = (1 +r)
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Unformatted text preview: t Four variables: FV, PV, r, t, given any 3 you can solve for the 4 th ! r = [FV/PV] 1/t – 1; t = = FV = PV (1 + r) t Special patterns: o Annuity: What is the PV of a series of cash flows C at the end of each of the next t years at r per year? ( a t year annuity of C at r)? PV = C x o Perpetuity: PV = C/r Compounding an investment m times a year for T years provides for future value of wealth: r = m x [(1 + EAR) 1/m - 1 ] EAR = (1 + ) m – 1 Annual Percentage rate: APR Special: non-constant interest rate, replace r with r 1, r 2, etc. Real vs. nominal rate: 1+real rate =...
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This note was uploaded on 02/25/2012 for the course CHEM 1341 taught by Professor Compton during the Fall '08 term at Texas State.

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