Time Value of Money Essay

5294 Words May 7th, 2014 22 Pages
12/9/2012

Chapter 9 The Time Value of Money

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Chapter 9- Learning Objectives
 Identify various types of cash flow patterns (streams) that are observed in business.  Compute (a) the future values and (b) the present values of different cash flow streams, and explain the results.  Compute (a) the return (interest rate) on an investment (loan) and (b) how long it takes to reach a financial goal.  Explain the difference between the Annual Percentage Rate (APR) and the Effective Annual Rate (EAR), and explain when each is more appropriate to use.  Describe an amortized loan, and compute (a) amortized loan payments and (b) the balance (amount owed) on an amortized loan at a specific point during its life.

Principles of Finance
…show more content…
Time 0 is today Time 1 is the end of Period 1 or the beginning of Period 2, and so forth.
Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Future Value
The amount to which a cash flow or series of cash flows will grow over a period of time when compounded at a given interest rate.

Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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12/9/2012

Future Value
How much would you have at the end of one year if you deposit $100 in a bank account that pays 5 percent interest each year?
FVn = FV1 = PV + INT = PV + PV(r) = PV (1 + r) = $100(1 + 0.05) = $100(1.05) = $105
Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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What’s the FV of an initial $700 after three years if r = 10%?

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10%

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700

FV = ?

Finding FV is Compounding
Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned,

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