usually yearly‚ in an account that bears interest. Once interest is earned‚ an annuity allows that interest to be compounded setting the way for an investor to earn interest on interest. Another important feature of compounding is time. The longer money is left in an account accruing interest‚ the more opportunity one has to earn a larger amount of money. It is also important to begin investing early. Again‚ the longer the time the money has to earn interest‚ the more profit one will gain. For example
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Value – Present Value – Value Additivity • Project Evaluation – Net Present Value – The Net Present Value Rule • Shortcuts to Special Cash Flows – Perpetuities - Growing Perpetuities – Annuities - Growing Annuities • Compound Interest Rates – Compound Interest versus Simple Interest – Discrete Compounding – Continuous Compounding – Effective Annual Yield • Adjusting for Inflation Principles of Finance Present Value - Page 3 Valuing Cash Flows • Most investment decisions involve trade-offs over
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Integrated Case 5-42 First National Bank Time Value of Money Analysis You have applied for a job with a local bank. As part of its evaluation process‚ you must take an examination on time value of money analysis covering the following questions. A. Draw time lines for (1) a $100 lump sum cash flow at the end of Year 2‚ (2) an ordinary annuity of $100 per year for 3 years‚ and (3) an uneven cash flow stream of -$50‚ $100‚ $75‚ and $50 at the end of Years 0 through 3. ANSWER: [Show
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effective interest rate formula or the APR‚ assume you agree to pay $440 for a washing machine. A down payment of $40 is made leaving $400 to be borrowed at a stated interest rate of 10 percent. The loan is to be paid off in 18 equal monthly installments. The finance charge can be calculated using the simple interest rate formula‚ I = PRT: I = $400 x 0.10 x 1.5 = $60 You are borrowing $400 (P) for 1.5 years (T) and you will owe a $60 finance charge (I). But is that the effective interest rate?
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the future value of $100 after 3 years if it earns 10%‚ annual compounding? FV = PV (1 + I)N = $100 (1.10)3 = $133.10 2. What’s the present value of $100 to be received in 3 years if the interest rate is 10%‚ annual compounding? PV = FV / (1 + I)N = $100 / 1.103 = $75.13 c. What annual interest rate would cause $100 to grow to $125.97 in 3 years? FV = PV (1+I)N $125.97 = $100 (1 + I)3 Using a financial calculator‚ I = 8.0% d. If a company’s sales are growing at a rate of
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Money Time Value Of Money The Time-Value Of Money Money like any other desirable commodity has a price. If you own money‚ you can‚ ’rent’ it to someone else‚ say a banker‚ who can use it to earn income. This ’rent’ is usually in the form of interest. The investor’s return‚ which reflects the time-value of money‚ therefore indicates that there are investment opportunities available in the market. The return indicates that there is a – risk-free rate of return rewarding investors for forgoing
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invest $1000 today at an interest rate of 10% per year‚ how much will you have 20 years from now‚ assuming no withdrawals in interim? 2. a. If you invest $100 every year from the next 20 years starting one year from today and you earn interest of 10% per year‚ how much will you have at the end of the 20 years? b. How much must you invest each year if you want to have $50000 at the end of the 20 years? 3. What is the present value of the following cash flows at an interest rate of 10% per year
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FIN 370 Lab Study Guide - All Weeks - Additional Formula (Compound interest) to what amount will the following investments accumulate? a. $5‚000 invested for 10 years at 10 percent compounded annually 5000 x (1.10)^10 = 5000 x2.5937 =12968.5 b. $8‚000 invested for 7 years at 8 percent compounded annually 8000 x (1.08)^7 = 8000 x 1.7138 = 13710.59 c. $775 invested for 12 years at 12 percent compounded annually 775 x (1.12)^12 = 775 x3.8959 =3019.38 d. $21‚000 invested for 5 years at 5 percent
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each of the next 10 years and deposit it in the bank. The bank pays 8 percent interest compounded annually for long-term deposits. How much will you have to save each year (to the nearest dollar)? b) Vernal Equinox wishes to borrow $10‚000 for three years. A group of individuals agrees to lend him this amount if he contracts to pay them $16‚000 at the end of the three years. What is the implicit compound annual interest rate implied by this contract (to the nearest whole percent)? Question No.
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FINANCIAL STATEMENTS Accrual-based approach – revenues are recorded at the point of sale and costs when they are incurred‚ not necessarily when a firm receives or pays out cash Cash flow approach – used by financial professionals to focus attention on current and prospective inflows and outflows of cash 1. Balance sheet a. Assets Cash and Cash Equivalents Marketable securities Accounts receivable Inventories Net property‚ plant and equipment Intangible assets b. Liabilities Accounts
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