Unformatted text preview: d of year 2 $108 (1
$116.64 0.08) (4.2) Substituting the expression between the equals signs in Equation 4.1 for the
$108 figure in Equation 4.2 gives us Equation 4.3:
Future value at end of year 2 $100 (1
$116.64 0.08) (1
0.08)2 0.08) (4.3) The equations in the preceding example lead to a more general formula for
calculating future value. The Equation for Future Value
The basic relationship in Equation 4.3 can be generalized to find the future value
after any number of periods. We use the following notation for the various inputs:
n future value at the end of period n
initial principal, or present value
annual rate of interest paid. (Note: On financial calculators, I is typically used to represent this rate.)
number of periods (typically years) that the money is left on deposit The general equation for the future value at the end of period n is
FVn PV (1 i)n (4.4) CHAPTER 4 Time Value of Money 137 A simple example will illustrate how to apply Equation 4.4.
EXAMPLE Jane Farber places $800 in a s...
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