RSM332H1 Chapter Notes - Chapter 5: Opportunity Cost, European Cooperation In Science And Technology, Interest
Document Summary
Money has a time value because it can be invested today and be worth more tomorrow. The opportunity cost of money is the interest rate that would be earned by investing it. Required rate of return (k) is also known as a discount rate. To make time value of money decisions, you will need to identify the relevant discount rate you should use. Simple interest is interest paid or received only on the initial investment (principal). The same amount of interest is earned in each year. Compound interest is interest that is earned on the principal amount and on the future interest payments. The future value of a si(cid:374)gle cash flo(cid:449) at a(cid:374)y ti(cid:373)e (cid:858)n(cid:859) is calculated usi(cid:374)g e(cid:395)uatio(cid:374) (cid:1009). 2. Simple interest grows principal in a linear manner. A term that represents the future value of an investment at a given rate of interest and for a stated number of periods. The fvif for 10 years at 8% would be:
