Introduction to Finance- Chapter 5
Introduction to Finance- Chapter 5 Fin 301
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This 0 page Class Notes was uploaded by Rodriguez Notetaker on Wednesday January 13, 2016. The Class Notes belongs to Fin 301 at Drexel University taught by Dr. Tricia Robak in Fall 2016. Since its upload, it has received 15 views. For similar materials see Principles of Finance in Finance at Drexel University.
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Date Created: 01/13/16
Chapter 5 Introduction to Valuation The Time Value of Money 51 Future Value and Compounding Future Value FV refers to the amount of money an investment will grow to over some period of time at some given interest rate Compounding The process of accumulating interest on an investment over time to earn more interest compounding the interest earning interest on interest 0 compound interest Interest 0 simple interest interest earned only on the original principal amount invested FV 0 the formula 0 PVpresent value x 1 in i interest n periods 0 Future value depends critically on the assumed interest rate specially for long lived investments 52 Present Value Present Value PV the current value of future cash flows discounted at the appropriate discount rate Formula 0 PV FVfuture value 1 in Present values tend to become small as the time horizon grows 53 More about the Present and Future Values Present versus future value 0 Present value factor is just the reciprocal of the future value factor When compounding 0 Always look the amount of time mention in the problem Ex Semi annually compounded twice Quarterly 4 times Daily 365 54 Summary and Conclusions 0 For a given rate of return we can determine the value at some point in the future of an investment made today by calculating the future value of that investment 0 We can determine the current worth of a future cash flow or series of cash flows for a given rate of return by calculating the present value of cash flows involved