FINA 2700 Chapter 5: The Time Value of Money
29 Nov 2016
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Value after t years = initial investment (1+r) 2. Compound interest interest earned on interest. Simple interest interest earned only on the original investment; no interest. Future value factor future value of a current cash flow of . Compound growth means that value increases each period by the factor is earned on interest (1+growth rate) The value today of a future cash flow. Discount rate (r) interest rate used to compute present values of future. Finding the investment period: *using example 5. 2, 1890 = 3000 (1/1. 08t, 1890/3000 = 1/1. 08t, 0. 63(1. 08) t = 1, 1. 08t = 1. 587, tlog1. 08 = log1. 587, t = log1. 587 / log1. 08, t = 6. To find the value at some future date of a stream of cash flows, calculate what each cash flow will be worth at that future date, and then add up these future values. Annuity equally spaced and level stream of cash flows. Perpetuity stream of level cash payments that never ends.
