Figure 41 time line time line depicting an

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Unformatted text preview: URE 4.1 Time Line Time line depicting an investment’s cash flows –$10,000 $3,000 $5,000 0 1 2 $4,000 $3,000 $2,000 3 4 5 End of Year 132 PART 2 Important Financial Concepts FIGURE 4.2 Compounding and Discounting Time line showing compounding to find future value and discounting to find present value Compounding Future Value –$10,000 $3,000 $5,000 0 1 2 $4,000 $3,000 $2,000 3 4 5 End of Year Present Value Discounting Because money has a time value, all of the cash flows associated with an investment, such as those in Figure 4.1, must be measured at the same point in time. Typically, that point is either the end or the beginning of the investment’s life. The future value technique uses compounding to find the future value of each cash flow at the end of the investment’s life and then sums these values to find the investment’s future value. This approach is depicted above the time line in Figure 4.2. The figure shows that the future value of each cash flow is measured at the end of the investment’s 5-year life. Alternatively,...
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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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