lecture_chap05_06A

50 earned on the first interest payment calculator

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Unformatted text preview: st = 1000 + 50 + 50 = 1100 • FV with compound interest = 1102.50 • The extra 2.50 comes from the interest of . 05(50) = 2.50 earned on the first interest payment Calculator • • • • • • Your financial calculator performs these types of calculations efficiently. Financial calculators include these variables and label them as: • Future value as “FV” • Present value as “PV” • Interest rate as “I” or “I/YR” or “%i” • Number of periods as “N” There is variation across calculators. See the calculator manual for the entry pattern. For example, some calculators make you hit Enter and Compute and others don’t. Read the calculator tips on pages 123 to 125 if you’re having trouble operating your calculator. Excel works similarly – you just need to use the functions PV and FV. Future Value – Example 2 • Suppose you invest $1000 for 5 years. How much would you have? • Formula Approach: • FV = 1000(1.05)5 = 1276.28 • Calculator Approach: • • • • 5N 5 I/Y 1000 PV CPT FV = -1276.28 Future Value – Example 3 • Suppose you had a relative deposit $10 at 5.5% interest 200 years ago. How much would the investment be worth today if interest is compounded? • Formula Approach • FV = 10(1.055)200 = 447,189.84 • Calculator Approach • 200 N • 5.5 I/Y • 10 PV • CPT FV = -447,189.84 Future Value – Example 3 continued • Suppose you had a relative deposit $10 at 5.5% interest 200 years ago. How much would the investment be worth today if interest is simple? • Simple interest = 10 + 200(10)(.055) = 210.55 • What is the effect of compounding? • Compounding added $446,979.29 to the value of the investment Future Value as a General Growth Formula • Suppose your company expects to increase unit sales of widgets by 15% per year for the next 5 years. If you currently sell 3 million widgets in one year, how many widgets do you expect to sell in 5 years? • Formula Approach • FV = 3,000,000(1.15)5 = 6,034,072 u...
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This document was uploaded on 02/06/2014.

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