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Lecture 9
This lecture is part of Chapter 4:
Investing in the Company
Today’s Lecture
2nd year: Value after two years = Value after one year + Interest
Substitute Line 1
Or:
Value after two years = (Present Value + Interest) + Interest
Hence we have:
FV ( N ) = PV * (1 + r ) N
16 8 2,143.59
17 9 2,357.95
18 10 2,593.74 =C17*(1+0.1)
19
16 8 2,143.59 80,000.00
17 9 2,357.95 60,000.00
18 10 2,593.74 =C17*(1+0.1)
40,000.00
19 11 2,853.12
20 12 3,138.43 20,000.00
13 3,452.27 0.00
14 3,797.50 0 10 20 30 40 50
15 4,177.25
16 4,594.97
A B C D E F G H I
2
3 My first inflation calculations
4
5 Current Value 1,000.00
6 Inflation 3%
7
8
9
Worth in todays
dollars
Same formula as for
10
11
In .. Years
1 970.87 =D5/(1+D6) Bonds!
12 2 942.60 =C11/(1+$D$6)
13 3 915.14 =C12/(1+$D$6)
14 4 888.49
15 5 862.61
16 6 837.48
17 7 813.09
14 8 789.41
15 9 766.42
16 10 744.09
Inflation
This may look like a small difference, but differences can add
up!
Inflation
From this calculation we see that in terms of today’s buying
power our original 1000 will only be worth 744 dollars in ten
years.
But we had also seen that our 1000 will grow to 2594 if invested
at 10% a year.
Oh that’s only 256 dollars less so
we still should have:
A B C D E F G H I
2
3 My first inflation calculations
4
5 Current Value 1,000.00
6 Inflation 3% Interest 10%
7
8 Value in Future
9 years Value
10
11 1 1,067.96 =D5/(1+$D$6)*(1+$H$6)
12 2 1,140.54 =C11/(1+$D$6)*(1+$H$6)
13 3 1,218.05 =C12/(1+$D$6)*(1+$H$6)
14 4 1,300.83
15 5 1,389.24
16 6 1,483.65
17 7 1,584.49
14 8 1,692.17
15 9 1,807.17
16 10 1,929.99
It’s different!
Inflation
It’s different because one should first reduce the value by the
inflation rate and then apply the interest.
Or:
The problem is now that the cash flow is expected to grow over
the years (since the business is hopefully getting better and
better).
Compound or be poor!