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Chapter 5 Notes

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Chapter 5 Notes

Uploaded by

zzcb7v6d6v
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 5 Notes

Definitions

Present Value: earlier money on a time line.

Future Value: later money on a time line.

Interest rate: “exchange rate” between earlier money and later money

Equations

Future Value (FV): PV(1 +r)^t


(PV=present value, R= period interest rate expressed as decimal, T= number of periods)

R= (FV/PV)^1/t – 1

T= ln(FV/PV)/ln(1+r)

Present Value – Important Relationship

• For a given interest rate - the longer the time period, the lower the present value.

Example: What is the present value of $500 to be received in 5 years? In 10 years? The discount
rate is 10%.

N=5, I/Y=10, FV=500, CPT PV = -310.46


PV = 500(1.10)5 = 310.46

N=10, I/Y=10, FV=500, CPT PV = -192.77


PV = 500(1.10)10 = 192.77
Example: You expect to receive 10,000 at graduation in 2 years. You plan on investing it at 11%
until you have $75,000. How long would you have to wait to achieve that amount?

T= ln(75,000/10,000)/ln(1+.11)
=ln7.5/ln1.11
=2.014903/.10436
= 19.31 years

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