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Calculations[1]

# Calculations[1] - Calculations Time Value of Money A dollar...

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Calculations

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Time Value of Money A dollar on hand today is worth more than a dollar to be received in the future because the dollar on hand today can be invested to earn interest to yield more than a dollar in the future. The Time Value of Money mathematics quantify the value of a dollar through time. This, of course, depends upon the rate of return or interest rate which can be earned on the investment. The Time Value of Money concepts will be grouped into two areas: Future Value and Present Value. Future Value describes the process of finding what an investment today will grow to in the future. Present Value describes the process of determining what a cash flow to be received in the future is worth in today's dollars. http://www.zenwealth.com/BusinessFinanceOnline/TVM/TimeValueOfMoney.html
Compounding Interest Under compound interest, interest is earned not only on the initial principal but also on the accumulated interest. Interest begins to be earned on the accumulated interest as soon as it is paid, which occurs at the end of each compounding period. This is in contrast to simple interest , under which interest is only earned on the initial principal. http://www.zenwealth.com/BusinessFinanceOnline/TVM/TimeValueOfMoney.html

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Compounding Interest cont. Albert Einstein called compound interest "the greatest mathematical discovery of all time". We think this is true partly because, unlike the trigonometry or calculus you studied back in high school, compounding can be applied to everyday life. The wonder of compounding (sometimes called "compound interest") transforms your working money into a state-of-the-art, highly powerful income- generating tool. Compounding is the process of generating earnings on an asset's reinvested earnings. To work, it requires two things: the re-investment of earnings and time . The more time you give your investments, the more you are able to accelerate the income potential of your original investment, which takes the pressure off of you. http://www.investopedia.com/university/beginner/beginner2.asp
Future Value The Future Value of a cash flow represents the amount, at some time in the future, that an investment made today will grow to if it is invested to earn a specific interest rate. For example, if you were to deposit \$100 today in a bank account to earn an interest rate of 10% compounded annually, this investment will grow to \$110 in one year. At the end of two years, the initial investment will have grown to \$121. Notice that the investment earned \$11 in interest during the second year, whereas, it only earned \$10 in interest during the first year. Thus, in the second year, interest was earned not only on the initial investment of \$100 but also on the \$10 in interest that was paid at the end of the first year. This occurs because the interest rate in the example is a compound interest rate.

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Calculations[1] - Calculations Time Value of Money A dollar...

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