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FIN 301 Exam 3 Notes

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30 views2 pages

FIN 301 Exam 3 Notes

Uploaded by

Will Hughes
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Future Value of an amount of money can be computed with the following formula:

FV = PV(1+r)n

The Present Value of an amount of money can be computed with the following formula:

FV
PV = n
(1+r )

The formula for the Future Value of an Annuity is the following:

[ ]
n
(1+ r) −1
FVA=CF 0
r

The formula for the Present Value of an Annuity is the following:

[ ]
1
1−
(1+ r)n
PVA=CF 0
r

The formula for the value of perpetuity is the following:

Value of a Perpetuity = Perpetual Cash Flow


Discount Rate

Future value- The value on some future date of money that you invest today.
Compound interest- Interest that is earned on a given deposit and has become part of the principle at the end of a specified period.
Principal- The amount of money on which interest is paid.
Present Value- The value in today’s dollars of some future cash flow.
Annuity- A stream of equal periodic cash flows over a specified time period. These cash flows can be inflows or outflows of funds.
Ordinary annuity- An annuity for which the cash flow occurs at the end of each period
Annuity due- An annuity for which the cash flow occurs at the beginning of each period.
Perpetuity- An annuity with an infinite life, providing continual annual cash flow.
Semiannual compounding- Compounding of interest over two periods within the year.
Quarterly compounding- Compounding of interest over four periods within the year.

Invest $400 per month into a retirement account that earns a 12% percent rate of return. How much will you have at the end of 20,
30, and 40 years?

r= 12%/12= 1%

n= (20, 30, and 40) *12= 240, 360, and 480 months respectively.

Use FVA formula say for 20 years= $400[(1+0.01)^240/0.01] = $1,397,958.65

You borrow $30,000 to purchase a new car. If you can borrow at 6% interest. How much are your monthly payments on a 5-year
loan?

r= 6%/12= 0.005% n= 5 years*12= 60 months PVA= Loan Amount

PVA= 1-1/ (1-0.005)^60 = 51.73 $30,000/51.73= $579.98 per month


0.005

What is the value of a $10,000 annual annuity at 8% forever?

$10,000/0.08= $125,000

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