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Unformatted text preview: Time Value of Money—3 Compounding and Discounting Compounding and Discounting Cash Flow Streams Cash Flow Streams 1 2 3 4 Cheetahs in Botswana Cheetahs in Botswana NCH Announcements Horizon Imports—bring three pages of your notes, spreadsheets, financial statements, and financial/ plotting calculator to the testing center—opens Thurs, closes Friday 11:30 am. Questions on Horizon Imports? TVM problems are for your joy and edification— they are printed in your packet right after Horizon. Next Monday is a reading quiz (BB) on Chapter 15. You may bring your spouse/fiancè to class (if there is room) on Monday/Wednesday. Sample TVM Problem How much will you receive after 6 years How much will you receive after 6 years if you invest $8,000 into a savings if you invest $8,000 into a savings account at 9 percent compounded account at 9 percent compounded quarterly? quarterly? a. $13,646 a. $13,646 b. $63,289 b. $63,289 c. $9,143 c. $9,143 d. $13,417 d. $13,417 I=2.25, N=24, PV=8000; FV=? What Does “Compounded Quarterly” Mean? I = 9%/4 = 2.25/quarter Say PV = 100, N=4 Invest for one year, how much at end? FV = 109.31 So, we say that “9%, compounded quarterly gives an effective annual rate of 9.31%.” What Does “Compounded Monthly” Mean? I = 9%/12 = 0.75/month Say PV = 100, N=12 Invest for one year, how much at end? FV = 109.38 So, we say that “9%, compounded monthly gives an effective annual rate of 9.38%.” What Does “Compounded Daily” Mean? I = 9%/365 = 0.024658/day Say PV = 100, N=365 Invest for one year, how much at end? FV = 109.42 So, we say that “9%, compounded daily gives an effective annual rate of 9.42%.” Sample TVM Problem You bought a race horse which has a winning You bought a race horse which has a winning streak for four years, bringing in $500,000 per streak for four years, bringing in $500,000 per year before dying of a heart attack. If you paid year before dying of a heart attack. If you paid $1,518,675 for the horse 4 years ago, what was $1,518,675 for the horse 4 years ago, what was your annual return over this 4 year period? your annual return over this 4 year period? (round to nearest whole percent) (round to nearest whole percent) a. 8% a. 8%a....
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 Fall '11
 JimBrau
 Compounding, effective annual rate, 100 BC, CFj, Sample TVM Problem

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