Capital Budgeting Npv

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NPROCESS First, consider future value. Future value (FV) refers to the amount of money to which an investment will grow over a finite period of time at a given interest rate. Put another way, future value is the cash value of an investment at a particular time in the future. Start by considering the simplest case, a single-period investment. Investing For a Single Period: Suppose you invest $100 in a savings account that pays 10 percent interest per year. How much will you have in one year? You will have $110. This $110 is equal to your original principal of $100 plus $10 in interest. We say that $110 is the future value of $100 invested for one year at 10 percent, meaning that $100 today is worth $110 in one year, given that the…show more content…
This process is called compounding. Compounding the interest means earning interest on interest so we call the result compound interest. With simple interest , the interest is not reinvested, so interest is earned each period is on the original principal only. EXTENSION ACTIVITY Interest on Interest... a. Suppose you locate a two-year investment that pays 14 percent per year. If you invest $325, how much will you have at the end of two years? How much of this is simple interest? How much is compound interest? At the end of the first year, you will have $325 x (1 + .14) = $370.50 . If you reinvested this entire amount, and thereby compound the interest, you will have $370.50 x 1.14 = $422.37 at the end of the second year. The total interest you earn is thus $422.37 -- 325 = $97.37. Your $325 original principal earns $325 x.14 = $45.50 in interest each year, for a two-year total of $91 in simple interest. The remaining $97.37 -- 91 = $6.37 results from compounding. How much will you have in the third year? b. Complete the Columns Below End of Year | Amount on Interest | Interest Rate | Interest Earned | Balance | 1 | $1,000 | 10% | $100 | $1100 | 2 | 1,100 | 10% | 110 | 1210 | 3 | | 10% | | | 4 | | 10% | | | 5 | | 10% | | | 6 | | 10% | | | 7 | | 10% | | | 8 | | 10% | | | 9 | | 10% | |
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