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4–1
4–2 LG2 What is the difference between future value and present value? Which
approach is generally preferred by financial managers? Why?
Define and differentiate among the three basic patterns of cash flow: (1) a
single amount, (2) an annuity, and (3) a mixed stream. Single Amounts
The most basic future value and present value concepts and computations concern single amounts, either present or future amounts. We begin by considering
the future value of present amounts. Then we will use the underlying concepts to
learn how to determine the present value of future amounts. You will see that
although future value is more intuitively appealing, present value is more useful
in financial decision making. Future Value of a Single Amount
Imagine that at age 25 you began making annual purchases of $2,000 of an investment that earns a guaranteed 5 percent annually. At the end of 40 years, at age 65,
you would have invested a total of $80,000 (40 years $2,000 per year). Assuming that all funds remain invested, how much would you have accumulated at the
end of the fortieth year? $100,000? $...

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