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FIN3303 1-31

# FIN3303 1-31 - Future Value The value of a lump sum or...

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1 Future  Value The value of a lump sum or stream of cash  payments at a future point in time:     Future Value  depends on:   interest  rate (up in IR up in  FV) Number of periods (yrs) compounding  interval FVn = PV(1+r)^n

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2 1 6 1 1 1 6 2 1 2 6 3 1 3 6 4 1 1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 The Power of Compound Interest Future Value of One Dollar (\$) Periods 0% 10% 5% 15% 20%
3 Future Value of \$200  ( 4 Years, 7% Interest  ) 0 1 2 3 4 PV = \$200 End of Year FV 4 = 262.16 FV 3 = 245.01 FV 2 = 228.98 FV 1 = 214 Compounding: the process of earning  interest in each successive year

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4 Compounding Intervals m compounding periods The more frequent the compounding period,  the larger the FV! FVn = PV (1+r/m)^m*n
5 Compounding More Frequently Than  Annually  For quarterly compounding, m equals 4:  For semiannual compounding, m equals 2: FV at end of 2 years of \$125,000 deposited at 5% interest Annually = \$137,812.50 FV2=125,000(1+.05/2)^2*2 = \$137,976.61 FV =125,000(1+.05/4)^4*2 =\$138,060.76

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FIN3303 1-31 - Future Value The value of a lump sum or...

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