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11 Corporate Finance Present value and opportunity cost of capital 3.3 Future value
The future value (FV) is the amount to which an investment will grow after earning interest. The future
value of a cash flow, C0, is:
(4) FV C 0 (1 r ) t Example:
– What is the future value of €200,000 if interest is compounded annually at a rate
of 5% for three years? FV
- €200,000 (1 .05) 3 €231,525 Thus, the future value in three years of €200,000 today is €231,525 if the discount
rate is 5 percent. 3.4 Principle of value additivity
The principle of value additivity states that present values (or future values) can be added together to
evaluate multiple cash flows. Thus, the present value of a string of future cash flows can be calculated as
the sum of the present value of each future cash flow: (5) PV C3
(1 r )
(1 r )
(1 r ) 3 Ct ¦ (1 r ) t Download free ebooks at bookboon.com
12 Corporate Finance Present value and opportunity cost of capital Example:
- The principle of value additivity can be applied to calculate the present value of t...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12