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• Calculator Approach
•5N
• 15 I/Y
• 3,000,000 PV
• CPT FV = 6,034,072 units Workshop #1
• Suppose you have $500 to invest and
you believe that you can earn 8% per
year over the next 15 years.
a) How much would you have at the end of 15
years using compound interest? Answer =
1,586.
b) How much would you have using simple
interest? Answer = 1,100 Present Values – 5.2
• How much do I have to invest today to
have some specified amount in the future?
• FV = PV(1 + r)t
• Rearrange to solve for PV = FV / (1 + r)t • Terminology: Discouting means finding
the present value of some future amount.
• Remember that there are four main
calculator buttons: FV, PV, I and N.
Previously we were computing for FV.
Now we’re computing for PV. Present Value – One Period
Example
• Suppose you need $10,000 in one year for
the down payment on a new car. If you can
earn 7% annually, how much do you need
to invest today?
• Formula Approach
• PV = 10,000 / (1.07)1 = 9345.79 • Calculator Approach
•
•
•
• 1N
7 I/Y
10,000 FV
CPT PV = 9345.79 Present Value – Example 2
• You want to begin saving for your daughter’s college
education and you estimate that she will need
$150,000 in 17 years. If you feel confident that you
can earn 8% per year, how much do you need to
invest today?
• Formula Approach
• PV = 150,000 / (1.08)17 = 40,540.34
• Calculator Approach
• N = 17
• I/Y = 8
• FV = 150,000
• CPT PV = 40,540.34 Present Value – Example 3
• Your parents set up a trust fund for you 10
years ago that is now worth $19,671.51. If
the fund earned 7% per year, how much
did your parents invest?
• Formula Approach
• PV = 19,671.51 / (1.07)10 = 10,000 • Calculator Approach
•
•
•
• N = 10
I/Y = 7
FV = 19,671.51
CPT PV = 10,000 Present Value – Important
Relationship I
• For a given interest rate – the longer the
time period, the lower the present value
• What is the present value of $500 to be
received in 5 years? 10 years? The
discount rate is 10%. Important Relationship I
continued
• Formula Approach
• 5 years: PV = 500 / (1.1)5 = 310.46
• 10 years: PV = 500 / (1.1)10 = 192.77 • Calculator Appro...
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This document was uploaded on 02/06/2014.
 Fall '14

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