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Unformatted text preview: ng the future value of present dollars invested at a given rate, discounting determines the present value of a future amount, assuming an opportunity to earn a
certain return on the money. This annual rate of return is variously referred to Future Value
Interest rates, time periods,
and future value of one
dollar Future Value of One Dollar ($) FIGURE 4.5
25.00 15% 20.00
15.00 10% 10.00 5% 5.00 0% 1.00
0 2 4 6 8 10 12 14 16 18 20 22 24
Periods 140 PART 2 Important Financial Concepts as the discount rate, required return, cost of capital, and opportunity cost. These
terms will be used interchangeably in this text.
EXAMPLE Paul Shorter has an opportunity to receive $300 one year from now. If he can
earn 6% on his investments in the normal course of events, what is the most he
should pay now for this opportunity? To answer this question, Paul must determine how many dollars he would have to invest at 6% today to have $300 one
year from now. Letting PV equal this unknown amount...
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