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Unformatted text preview: ect of compounding is small for a small
number of periods, but increases as the
number of periods increases. (Simple interest
would have a future value of $1,250, for a
difference of $26.28.)
difference 8 Future Values – Example 3 Suppose you had a relative deposit $10 at 5.5%
interest 200 years ago. How much would the
investment be worth today?
investment FV = 10(1.055)200 = 447,189.84 What is the effect of compounding? Simple interest = 10 + 200(10)(.055) = 120.00
Compounding added $447,069.84 to the value of the
investment 9 Future Value as a General
Growth Suppose your company expects to
Suppose increase unit sales of widgets by 15% per
year for the next 5 years. If you currently
sell 3 million widgets in one year, how
many widgets do you expect to sell in 5
years? FV = 3,000,000(1.15)5 = 6,034,072 10
10 Quick Quiz – Part I What is the difference between simple interest
and compound interest?
Suppose you have $500 to invest and you
believe that you can earn 8% per year over the
next 15 years.
next How much would you have at the end of 15 years
using compound interest?
How much would you have using simple interest? 11
11 Present Values How much do I have to invest today to have some
amount in the future?
amount FV = PV(1 + r)t
Rearrange to solve for PV = FV / (1 + r)t When we talk about discounting, we mean finding the
present value of some future amount.
When we talk about the “value” of something, we are
talking about the present value unless we specifically
indicate that we want the future value.
12 Present Value – One Period
Example Suppose you need $10,000 in one year for the down
payment on a new car. If you can earn 7% annually,
how much do you need to invest today?
PV = 10,000 / (1.07)1 = 9,345.79
CPT PV = -9,345.79 13
13 Present Values – Example 2 You want to begin saving for your
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