Chapter 4 time value of money 157 comparing the

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Unformatted text preview: Continuous compounding involves compounding over every microsecond—the smallest time period imaginable. In this case, m in Equation 4.18 would approach infinity. Through the use of calculus, we know that as m approaches infinity, the equation becomes FVn (continuous compounding) PV (ei n) (4.19) where e is the exponential function10, which has a value of 2.7183. The future value interest factor for continuous compounding is therefore FVIFi,n (continuous compounding) EXAMPLE ei n (4.20) To find the value at the end of 2 years (n 2) of Fred Moreno’s $100 deposit (PV $100) in an account paying 8% annual interest (i 0.08) compounded continuously, we can substitute into Equation 4.19: FV2 (continuous compounding) $100 $100 $100 e0.08 2 2.71830.16 1.1735 $117.35 Calculator Use To find this value using the calculator, you need first to find the value of e0.16 by punching in 0.16 and then pressing 2nd and then ex to get 1.1735. 10. Most calculators have the exponential function, typically noted by ex, built into them. The use of this key is especially helpful in calculating futu...
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This document was uploaded on 03/03/2014 for the course MBA BMMF at Open University Malaysia.

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