Module 3 Flashcards
After studying this chapter, you should be able to: 1. Calculate the future value of an investment made today. 2. Calculate the present value of cash to be received at a future date. 3. Calculate the return on an investment. Calculate how long it takes for an investment to reach a desired value
Time Value of Money
Refers to the fact that a dollar in hand today is worth more than a dollar promised at sometime in the future.
Investing for a single period
If you invest for one period at an interest rate of r, your investment will grow to (1 + r) per dollar invested
Compounding
the process of leaving your money and any accumulated interest in an investment for more than one period
Compound Interest
Interest made on interest
Simple interest
the interest is not reinvested, so interest is earned each period only on the original principal
Compounding Equation
Future Value (FV) = Present Value (PV) * (1 +r )^t
Future Value Interest Factor
(1 +r )^t
Present Value
the reverse of future value; discount back to the present
Present Value Equation
PV = FV / (1 + r)^t
Future Value Equation
FV = PV * (1 + r)^t
Present Value Factor
1 / (1 + r)^t
Future Value Factor
(1 + r)^t
Determining the Discount Rate
(1 + r)^t = FV / PV
The Rule of 72
The time it takes to double your money is given approximately by 72/%r
