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Ch3-W11

# Ch3-W11 - Chapter 3 Cash Flow Analysis Useful Formulas 4...

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Chapter 3: Cash Flow Analysis Useful Formulas 4 major formulas that quicken lengthy calculations Mnemonic symbols to help choose the right formula Example 3-1: How much money will be in a bank account at the end of 2 years if \$5000 is deposited today. Interest rate is 12% compounded monthly. We know: P, i, N Find: F Mnemonic: F = P*(F/P, i, N) (F/P, i, N) = (1 + i) N

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Example 3-2: What amount deposited today into an account bearing 12% nominal interest will give \$5000 at the end of two years? Interest is compounded monthly. Know: Find: Mnemonic: N ) i 1 ( 1 ) N , i , F / P ( + =
About Compound Interest Tables All compound interest factors are fairly easy to compute Tables are from an era before widespread availability of microcomputers Don’t use them in practice, but they’re handy on exams Example 3-2 (Using the Interest Tables): What amount deposited today into an account bearing 12% nominal interest will give \$5000 at the end of two years? Interest is compounded monthly. i=1% N=24 Discrete Compounding Single payment See Appendix A, page 507, (P/F,1%,24)=0.78757 P=(\$5000)0.78759=\$3937.83

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Example 3-3: You have decided to put A = \$50 per month into a savings account that earns 6% per year, compounded monthly. How much will be in the account in 5 years (just after the 60 th deposit) ? 1 50 50 50 2 60 0 0 F= ? 60 F = A*(F/A, i, N) = 50*(F/A, 0.5%, 60)

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Example 3-4: You want to save \$20 000 for a new car over the time you are at university (5 years) by saving the same amount, A, each month. You can get 7% compounded monthly. What should you save each month? 0
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