TIME VALUE OF MONEY 1 Time Value of Money Compound Interest a Simple Interest b Compound Interest earned interest i P R T Earns interest on principal invested i Earns interest on both principal invested as well as previously c Four Time Value of Money Cases For all you need to know the number of periods n and the interest rate i d Lump Sum Single payment e Annuity Series of equal payments with same time interval between i Occurring at the END of each period is an Ordinary Annuity ii Payments occurring at the BEGGINNING of each period is an iii FV of a Lump Sum Know value today want to find value in Annuity Due future 1 FV PV x FV Factor i n 2 Adjustments I of compounds per year a b N x of compounds per year 3 FV Factor 1 i n 4 Compound Frequency Inc then FV inc because more interest is earned iv PV of a Lump Sum Know value in future want to find value in present called DISCOUNTING 1 PV FV x Present Value Factor I n 2 PV lump sum and the FV lump sum are reciprocal of each other 3 As compounding frequency increases PV decreases because you are earning interest more v FV of an Annuity Find value of series of equal cash flows occurring at the end of each period some time in the future 1 FV Ordinary Annuity Payment x FV Annuity Factor I n 2 FV Annuity Due Ordinary Annuity Factor x 1 i vi PV of an Annuity Know the value today of a series of equal payments to be made received in the future 1 Occurring at the end of each period worth today 2 PV Ordinary Annuity Payment x PV Annuity Factor I n 3 PV Annuity Due Factor Ordinary annuity factor x f Easier to compare present value dollars 1 i
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