Therefore accountants rely on precise mathematical

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Unformatted text preview: clear cut as Alpha and Beta. Therefore, accountants rely on precise mathematical techniques to quantify the time value of money. your chance Please click the advert to change the world Here at Ericsson we have a deep rooted belief that the innovations we make on a daily basis can have a profound effect on making the world a better place for people, business and society. Join us. In Germany we are especially looking for graduates as Integration Engineers for • Radio Access and IP Networks • IMS and IPTV We are looking forward to getting your application! To apply and for all current job openings please visit our web page: Download free ebooks at 21 Compound Interest and Present Value Analytics for Managerial Decision Making 4.1 Compound Interest The starting point for understanding the time value of money is to develop an appreciation for compound interest. “The most powerful force in the universe is compound interest.” The preceding quote is often attributed to Albert Einstein, the same chap who unlocked many of the secrets of nuclear energy. While it is not clear that he actually held compound interest in such high regard, it is clear that understanding the forces of compound interest is a powerful tool. Very simply, money can be invested to earn money. In this context, consider that when you spend a dollar on a soft drink, you are actually foregoing 10¢ per year for the rest of your life (assuming a 10% interest rate). And, as you will soon see, that annual dime of savings builds to much more because of interest that is earned on the interest! This is the almost magical power of compound interest. Compound interest calculations can be used to compute the amount to which an investment will grow in the future. Compound interest is also called future value. If you invest $1 for one year, at 10% interest per year, how much will you have at the end of the year? The answer, of course, is $1.10. This is calculated by multiplying the $1 by 10% ($...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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