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cfc session 6 ch6+7

# 0 1 7 2 1000 fv2 12 certified financial controller

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Unformatted text preview: V2 12 Certified Financial Controller CFC 6 Future Value Single Deposit (Formula) FV1 = P0 (1+i)1 = \$1,000 (1.07) = \$1,070 Compound Interest You earned \$70 interest on your \$1,000 deposit over the first year deposit over the first year. This is the same amount of interest you would earn under simple interest. 13 Certified Financial Controller CFC Future Value Single Deposit (Formula) FV1 = P0 (1+i)1 FV2 = FV1 (1+i)1 = P0 (1+i)(1+i) = \$1,000 000(1.07)(1.07) = P0 (1+i)2 = \$1,000(1.07)2 = \$1,144.90 144. 14 = \$1,000 (1.07) = \$1,070 You earned an EXTRA \$4.90 in Year 2 with compound over simple interest. Certified Certified Financial Controller CFC 7 General Future Value Formula FV1 = P0(1+i)1 FV2 = P0(1+i)2 etc. General Future Value Formula: FVn = P0 (1+i)n or FVn = P0 (FVIFi,n) -- See Table I FVIF 15 Certified Financial Controller CFC Valuation Using Table I FVIFi,n is found on Table I found on Table at the end of the book. 16 Period 1 2 3 4 5 6% 1.060 1.124 1.191 1.262 1.338 7% 1.070 1.145 1.225 1.311 1.403 Certified Financial Controller CFC 8 8% 1.080 1.166 1.260 1.360 1.469 Using Future Value Tables = \$1,000 (FVIF7%,2) = \$1,000 (1.145) = \$1,145 [Due to Rounding] Period 6% 7% 8% 1 1.060 1.070 1.080 2 1.124 1.145 1.166 3 1.191 1.225 1.260 4 1.262 1.311 1.360 5 1.338 1.403 1.469 FV2 17 Certified Financial Controller CFC Story Problem Example Julie Miller wants to know how large her deposit Miller wants to know how large her deposit of \$10,000 today will become at a compound 10, annual interest rate of 10% for 5 years. years 0 1 2 3 4 5 10% \$10,000 10, FV5 18 Certified Financial Controller CFC 9 Story Problem Solution Calculation based on general formula: based on general formula: FVn = P0 (1+i)n FV5 = \$10,000 (1+ 0.10)5 = \$16,105.10 16,105. Calculation based on Table I: FV5 = \$10,000 (FVIF10%, 5) FVIF = \$10,000 (1.611) = \$16,110 [Due to Rounding] 16, 19 Certified Financial Controller CFC Double Your Money!!! Quick! How long does it take to double \$5,000 at a compound rate of 12% per year (approx.)? We will use the “Rule-of-72”. Rule-of- 20 Certified Financial Controller CFC 10 The “Rule-of-72” “Rule-of-72” Quick! How long does it take to double \$5,000 at a compound rate of 12% per year (approx.)? Approx. Years to Double = 72 / i% Years to Double 72 i% 72 / 12% = 6 Years Years [Actual Time is 6.12 Years] 21 Certified Financial Controller CFC Present Value Single Deposit (Graphic) Assume that you need \$1,000 in 2 years. Let’s examine the process to determine th how much you need to deposit today at a discount rate of 7% compounded annually. 0 7% 1 2 \$1,000 PV0 22 PV1 Certified Financial Controller CFC 11 Present Value Single Deposit (Formula) PV0 = FV2 / (1+i)2 FV = FV2 / (1+i)2 0 = \$1,000 / (1.07)2 = \$873.44 873. 1 7% 2 \$1,000 PV0 23 Certified Financial Controller CFC General Present Value Formula PV0 = FV1 / (1+i)1 FV PV0 = FV2 / (1+i)2 etc. General Present Value Formula: Present Value Formula: PV0 = FVn / (1+i)n or 24 PV0 = FVn (PVIFi,n) -- See Table II PVIF Certified Financial Controller CFC 12 Valuation Using Table II PVIFi,n is found on Table II found on Table II at the end of the book. Period 1 2 3 4 5 25 6% .943 .890 .840 .792 .747 7% .935 .873 .816 .763 .713 8% .926 .857 .794 .735 .681 Certified Certified Fi...
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