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ARE144-Docs - 1 Managerial Economics (ARE) 143 University...

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1 Managerial Economics (ARE) 143 University of California, Davis Instructor: John H. Constantine Chapter 3—Formula Sheet for Time Value of Money Time Value of Money Methods: (1) Present Value (PV) (2) Future Value (FV) For both PV and FV, there are three types of cash flows to consider: (1) Make a single payment at t = 0, wait N years, cash out. (2) Make periodic payments for each of N years. Payments can vary from period-to-period; zero is possible entry. (PMT 1 , PMT 2 , …, PMT N .) (3) Annuities. Make regular periodic payments, with each payment being the exact same amount. (PMT 1 = PMT 2 = … = PMT N = PMT ) Compounding periods per year: (1) m = 1; annual compounding (2) m = 2; semi-annual compounding (3) m = 12; monthly compounding In general: (1) APR =Annual Percentage Rate i = APR (2) EAY = Effective Annual Yield APY = Annual Percentage Yield EAY = APY Importantly, EAY = APY takes into account compounding: 1 m APR 1 APY EAY m 1 m i 1 APY EAY m
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ARE144-Docs - 1 Managerial Economics (ARE) 143 University...

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