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We know that receiving $1 today is worth more than $1 in the future. This is due to opportunity costs.
Today
Future
?
Translate $1 in the future into its equivalent today
(discounting).
?
Translate $1 in the future into its equivalent today
(discounting).
Today Future
Compound Interest
PV =
0
FV =
1
PV = -100
0
FV =
1
PV = -100
0
FV = 106
1
PV = -100
FV = 106
0 1 Mathematical Solution: FV = PV (FVIF i, n ) FV = 100 (FVIF .06, 1 ) (use FVIF table, or) FV = PV (1 + i)n FV = 100 (1.06)1 = $106
PV =
0
FV =
5
PV = -100
0
FV =
5
PV = -100
0
FV = 133.82
5
PV = -100
FV = 133.82
0 5 Mathematical Solution: FV = PV (FVIF i, n ) FV = 100 (FVIF .06, 5 ) (use FVIF table, or) FV = PV (1 + i)n FV = 100 (1.06)5 = $133.82
PV =
0
FV =
?
PV = -100
0
FV =
20
PV = -100
0
FV = 134.68
20
PV = -100
FV = 134.68
0 20 Mathematical Solution: FV = PV (FVIF i, n ) FV = 100 (FVIF .015, 20 ) (cant use FVIF table) FV = PV (1 + i/m) m x n FV = 100 (1.015)20 = $134.68
PV =
0
FV =
?
PV = -100
0
FV =
60
PV = -100
0
FV = 134.89
60
PV = -100
0
FV = 134.89
60
Mathematical Solution: FV = PV (FVIF i, n ) FV = 100 (FVIF .005, 60 ) (cant use FVIF table) FV = PV (1 + i/m) m x n FV = 100 (1.005)60 = $134.89
PV =
0
FV =
?
PV = -1000
0
FV =
100
PV = -1000
0
FV = $2.98m
100
Present Value
PV =
0
FV =
?
PV =
0
FV = 100
1
PV = -94.34
0
FV = 100
1
PV = -94.34
FV = 100
0 1 Mathematical Solution: PV = FV (PVIF i, n ) PV = 100 (PVIF .06, 1 ) (use PVIF table, or) PV = FV / (1 + i)n PV = 100 / (1.06)1 = $94.34
PV =
0
FV =
?
PV =
0
FV = 100
5
PV = -74.73
0
FV = 100
5
PV = -74.73
0
FV = 100
5
Mathematical Solution: PV = FV (PVIF i, n ) PV = 100 (PVIF .06, 5 ) (use PVIF table, or) PV = FV / (1 + i)n PV = 100 / (1.06)5 = $74.73
PV =
0
FV =
15
PV =
0
FV = 1000
15
PV = -362.45
0
FV = 1000
15
PV = -362.45
FV = 1000
0 15 Mathematical Solution: PV = FV (PVIF i, n ) PV = 100 (PVIF .07, 15 ) (use PVIF table, or) PV = FV / (1 + i)n PV = 100 / (1.07)15 = $362.45
PV =
0
FV =
5
PV = -5000
0
FV = 11,933
5