Time Value of Money

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12/9/2012 Chapter 9 The Time Value of Money 1 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…
After 3 years: FV3 = PV(1 + r)3 = $700 (1.10)3 = $931.70 After 2 years: FV2 = PV(1 + r)2 = $700 (1.10)2 = $847.00. In general, FVn = PV (1 + r)n 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. 9 Three Ways to Solve Time Value of Money Problems Use Equations Use Financial Calculator Use Electronic Spreadsheet 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. 10 5 12/9/2012 Numerical (Equation) Solution FVn = PV(1+ r)n PV = $700, r = 10%, and n =3 FVn = $700(1.10)3 = $700(1.3310) = $931.70 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. 11 Financial Calculator Solution FVn = PV(1+ r)n There are 4 variables. If 3 are known, the calculator will solve for the 4th. 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

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