Value – Present Value – Value Additivity • Project Evaluation – Net Present Value – The Net Present Value Rule • Shortcuts to Special Cash Flows – Perpetuities - Growing Perpetuities – Annuities - Growing Annuities • Compound Interest Rates – Compound Interest versus Simple Interest – Discrete Compounding – Continuous Compounding – Effective Annual Yield • Adjusting for Inflation Principles of Finance Present Value - Page 3 Valuing Cash Flows • Most investment decisions involve trade-offs over
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Integrated Case 5-42 First National Bank Time Value of Money Analysis You have applied for a job with a local bank. As part of its evaluation process‚ you must take an examination on time value of money analysis covering the following questions. A. Draw time lines for (1) a $100 lump sum cash flow at the end of Year 2‚ (2) an ordinary annuity of $100 per year for 3 years‚ and (3) an uneven cash flow stream of -$50‚ $100‚ $75‚ and $50 at the end of Years 0 through 3. ANSWER: [Show
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effective interest rate formula or the APR‚ assume you agree to pay $440 for a washing machine. A down payment of $40 is made leaving $400 to be borrowed at a stated interest rate of 10 percent. The loan is to be paid off in 18 equal monthly installments. The finance charge can be calculated using the simple interest rate formula‚ I = PRT: I = $400 x 0.10 x 1.5 = $60 You are borrowing $400 (P) for 1.5 years (T) and you will owe a $60 finance charge (I). But is that the effective interest rate?
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the future value of $100 after 3 years if it earns 10%‚ annual compounding? FV = PV (1 + I)N = $100 (1.10)3 = $133.10 2. What’s the present value of $100 to be received in 3 years if the interest rate is 10%‚ annual compounding? PV = FV / (1 + I)N = $100 / 1.103 = $75.13 c. What annual interest rate would cause $100 to grow to $125.97 in 3 years? FV = PV (1+I)N $125.97 = $100 (1 + I)3 Using a financial calculator‚ I = 8.0% d. If a company’s sales are growing at a rate of
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invest $1000 today at an interest rate of 10% per year‚ how much will you have 20 years from now‚ assuming no withdrawals in interim? 2. a. If you invest $100 every year from the next 20 years starting one year from today and you earn interest of 10% per year‚ how much will you have at the end of the 20 years? b. How much must you invest each year if you want to have $50000 at the end of the 20 years? 3. What is the present value of the following cash flows at an interest rate of 10% per year
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Money Time Value Of Money The Time-Value Of Money Money like any other desirable commodity has a price. If you own money‚ you can‚ ’rent’ it to someone else‚ say a banker‚ who can use it to earn income. This ’rent’ is usually in the form of interest. The investor’s return‚ which reflects the time-value of money‚ therefore indicates that there are investment opportunities available in the market. The return indicates that there is a – risk-free rate of return rewarding investors for forgoing
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FIN 370 Lab Study Guide - All Weeks - Additional Formula (Compound interest) to what amount will the following investments accumulate? a. $5‚000 invested for 10 years at 10 percent compounded annually 5000 x (1.10)^10 = 5000 x2.5937 =12968.5 b. $8‚000 invested for 7 years at 8 percent compounded annually 8000 x (1.08)^7 = 8000 x 1.7138 = 13710.59 c. $775 invested for 12 years at 12 percent compounded annually 775 x (1.12)^12 = 775 x3.8959 =3019.38 d. $21‚000 invested for 5 years at 5 percent
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each of the next 10 years and deposit it in the bank. The bank pays 8 percent interest compounded annually for long-term deposits. How much will you have to save each year (to the nearest dollar)? b) Vernal Equinox wishes to borrow $10‚000 for three years. A group of individuals agrees to lend him this amount if he contracts to pay them $16‚000 at the end of the three years. What is the implicit compound annual interest rate implied by this contract (to the nearest whole percent)? Question No.
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ordinary problems: they just write down the answers. Interest and Exponential Growth (Math | General | Interest and Exponential Growth) The Compound Interest Equation P = C (1 + r/n) nt where P = future value C = initial deposit r = interest rate (expressed as a fraction: eg. 0.06) n = # of times per year interest is compounded t = number of years invested Simplified Compound Interest Equation When interest is only compounded once per year (n=1)‚ the equation
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morning. Her money will earn 5 percent interest‚ compounded annually. After five years‚ her savings account will be worth $5000. Assume she will not make any withdrawals. Given this‚ which one of the following statements is true? A) Samantha deposited more than $5600 this morning. B) The present value of Samantha’s account is $5600 C) Samantha could have deposited less money and still had $5600 in five years if she could have earned 5.5 percent interest. D) Samantha would have had to deposit
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