Orthebeginningofthe secondperiod drawingtimelines

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Unformatted text preview: i% CF0 Show the timing of cash flows. Tick marks occur at the end of periods, so Time 0 is today; Time 1 is the end of the first period (year, month, etc.) or the beginning of the second period. Drawing time lines Drawing time lines $100 lump sum due in 2 years 0 1 2 i% 3 year $100 ordinary annuity 0 100 1 2 3 100 100 100 i% Drawing time lines Drawing time lines Uneven cash flow stream; CF0 = ­$50, CF1 = $100, CF2 = $75, and CF3 = $50 Uneven cash flow stream 0 1 2 3 100 75 50 i% -50 Future Values: General Formula Future Values: General Formula FV = PV(1 + r)t FV = future value PV = present value r = period interest rate T = number of periods There are four parts to this equation PV, FV, r and t If we know any three, we can solve for the fourth Future value interest factor = (1 + r)t Future Values – Example 1 Future Values – Example 1 Suppose you invest $1000 for one year at 5% per year. What is the future value in one year? Interest = 1000(.05) = 50 Value in one year = principal + interest = 1000 + 50 = 1050 Future Value (FV) = 1000(1 + .05) = 1050 Suppose you leave the money in for...
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