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1-16 Notes BF - FV = PV(1 r t Rearrange to solve for PV =...

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1/16/07 Business Finance Notes Time Value of Money Definitions o Present Value- earlier money on a time line o Future Value – later money on a time line o Interest Rate – “Exchange rate” between earlier money and later money Discount Rate Cost of Capital Opportunity cost of capital Required Return Future Value o Suppose you invest $1,000 for one year at 5% Interest = 1,000 (.05) = 50 FV = PV(1 + r) t FV = future value PV = present value r = period interest rate, expressed as a decimal t = number of periods Future value interest factor = (1 + r) t Effects of Compounding o Simple interest o Compound interest Interest that is made on the interest Present Value o How much do I have to invest today to have some amount in the future?
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Unformatted text preview: FV = PV(1 + r) t Rearrange to solve for PV = FV / (1 + r) t o When we talk about discounting, we mean finding the present value of some future amount o When we talk about the “value” of something, we are talking about the present value unless it is specifically indicated that we want the future value • Discount Rate o Often, we will want to know what the implied interest rate is in an investment o Rearrange the basic PV equation and solve for r FV = PV(1 + r) t R = (FV/PV) 1/t – 1 • Finding the number of periods o Start with basic equation and solve for t FV = PV(1 + r) t t = ln(FV / PV)/ln(1 + r)...
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