# You fv 10001055 127628 the effect of compounding

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Unformatted text preview: ect of compounding is small for a small The 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% Suppose 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 Compounding investment investment 9 Future Value as a General Future Growth Formula 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? years? FV = 3,000,000(1.15)5 = 6,034,072 10 10 Quick Quiz – Part I What is the difference between simple interest What and compound interest? and Suppose you have \$500 to invest and you Suppose 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 How using compound interest? using How much would you have using simple interest? 11 11 Present Values How much do I have to invest today to have some How 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 When present value of some future amount. present When we talk about the “value” of something, we are When talking about the present value unless we specifically indicate that we want the future value. indicate 12 12 Present Value – One Period Present Example Example Suppose you need \$10,000 in one year for the down Suppose payment on a new car. If you can earn 7% annually, how much do you need to invest today? how PV = 10,000 / (1.07)1 = 9,345.79 Calculator 1N 7 I/Y 10,000 FV CPT PV = -9,345.79 13 13 Present Values – Example 2 You want to begin saving for your You daugh...
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## This document was uploaded on 04/02/2014.

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