Академический Документы
Профессиональный Документы
Культура Документы
Slide Contents
Learning Objectives
Principles Applied in this Chapter
5.1
5.2
5.3
5.4
Key Terms
5-2
Learning Objectives
1. Construct cash flow timelines to organize
your analysis of problems involving the
time value of money.
2. Understand compounding and calculate the
future value of cash flows using
mathematical formulas, a financial
calculator, and an Excel spreadsheet.
5-3
5-4
5-5
5-6
5-7
Years
Cash flow
-$100
$30
$20
-$10
$50
5-8
5-9
5-10
5-11
PV or
Interest Earned (5%)
Beginning Value
FV or
Ending
Value
$500.00
$500*.05 = $25
$525
$525.00
$525*.05 = $26.25
$551.25
$551.25
$551.25*.05 =$27.56
$578.81
$578.81
$578.81*.05=$28.94
$607.75
$607.75
$607.75*.05=$30.39
$638.14
5-12
5-13
5-14
5-15
= 15,737.21 DVDs
5-16
CHECKPOINT 5.2:
CHECK YOURSELF
Calculating the FV of a Cash Flow
What is the FV of $10,000 compounded at
12% annually for 20 years?
5-17
20
-$10,000
Future
Value=?
5-18
5-19
Step 3: Solve
Solve Using a Mathematical Formula
FV
= $10,000(1.12)20
= $10,000(9.6463)
= $96,462.93
5-20
FV = $96,462.93
5-21
Step 4: Analyze
If you invest $10,000 at 12%, it will grow
to$96,462.93 in 20 years.
5-22
5-23
5-24
CHECKPOINT 5.3:
CHECK YOURSELF
Calculating Future Values Using
Non-Annual Compounding Periods
If you deposit $50,000 in an account that pays
an annual interest rate of 10% compounded
monthly, what will your account balance be
in 10 years?
Copyright 2014 Pearson Education, Inc. All rights reserved.
5-25
i=10%
Months
Cash flow
120
-$50,000
FV of $50,000
Compounded for
120 months
@ 10%/12
5-26
5-27
Step 3: Solve
Using a Mathematical Formula
FV = PV (1+i/12)m*12
= $50,000
(1+0.10/12)10*12
= $50,000
(2.7070)
= $135,352.07
Using a Financial
Calculator
N = 120
I/Y = .833%
PV = -50,000
PMT = 0
FV = $135,352
5-28
=FV(0.00833,120, 0,-50000)
= $135,346.71
5-29
Step 4: Analyze
More frequent compounding leads to a
higher FV as you are earning interest more
often on interest you have previously
earned.
If the interest was compounded annually,
the FV would have been equal to only
$129,687.12
$50,000 (1.10)10 = $129,687.12
5-30
5-31
5-32
5-33
5-34
CHECKPOINT 5.4:
CHECK YOURSELF
Solving for the PV of a Future Cash Flow
What is the present value of $100,000 to be
received at the end of 25 years given a 5%
discount rate?
5-35
Cash flow
25
$100,000
Present
Value =?
5-36
5-37
Step 3: Solve
Using a Mathematical
Formula
PV
= $100,000
[1/(1.05)25)
= $100,000 [0.2953]
= $29,530
Using a Financial
Calculator
N = 25
I/Y = 5
PMT = 0
FV = 100,000
PV = -$29,530
5-38
Step 4: Analyze
Once youve found the present value, it can
be compared to other present values. Present
value computation makes cash flows that
occur in different time periods comparable so
that we can make good decisions.
5-39
5-40
The Rule of 72
It determine the number of years it will take
to double the value of your investment.
N = 72/interest rate
For example, if you are able to generate an annual
return of 9%, it will take 8 years (=72/9) to double
the value of investment.
5-41
CHECKPOINT 5.5:
CHECK YOURSELF
Solving for Number of Periods, n
How many years will it take for $10,000 to
grow to $200,000 given a 15% compound
growth rate?
5-42
Cash flow
-$10,000
N =?
$200,000
We know FV,
PV, and i and
are solving for
N
5-43
5-44
Step 3: Solve
Using a Financial Using an Excel
Calculator
Spreadsheet
I/Y = 15
PMT = 0
PV = -10,000
FV = 200,000
N = NPER(rate,pmt,pv,fv)
= NPER(.15,0,-10000,200000)
= 21.4 years
N = 21.4 years
5-45
Step 4: Analyze
It will take 21.4 years for $10,000 to grow to
$200,000 at an annual interest rate of 15%.
5-46
5-47
CHECKPOINT 5.6:
CHECK YOURSELF
Solving for the Interest Rate, i
At what rate will $50,000 have to
grow to reach $1,000,000 in 30
years?
Copyright 2014 Pearson Education, Inc. All rights reserved.
5-48
1
-$50,000
30
$1,000,000
We know FV, PV
and N and are Solving
for interest rate
5-49
5-50
Step 3: Solve
Using a Mathematical
Formula
Using an Excel
Spreadsheet
I = (FV/PV)1/n - 1
= (1000000/50000)1/30 - 1
= (20)0.0333 - 1
= 1.1050 - 1
= .1050 or 10.50%
5-51
Step 4: Analyze
You will have to earn an annual interest rate
of 10.50 percent for 30 years to increase the
value of investment from $50,000 to
$1,000,000.
5-52
5-53
5-54
5-55
CHECKPOINT 5.7:
CHECK YOURSELF
Calculating an EAR
What is the EAR on a quoted or
stated rate of 13 percent that is
compounded monthly?
Copyright 2014 Pearson Education, Inc. All rights reserved.
5-56
12
Compounding periods
are expressed in months
(i.e. m=12) and we are
Solving for EAR
5-57
5-58
Step 3: Solve
EAR
= [1+.13/12]12 - 1
= 1.1380 1
= .1380 or 13.80%
5-59
Step 4: Analyze
There is a significant difference between
APR and EAR (13.00% versus 13.80%).
If the interest rate is not compounded
annually, we should compute the EAR to
determine the actual interest earned on an
investment or the actual interest paid on a
loan.
5-60
To the Extreme:
Continuous Compounding
As m (number of compounding period)
increases, so does the EAR. When the time
intervals between when interest is paid are
infinitely small, we can use the following
mathematical formula to compute the EAR.
EAR = (e quoted rate ) 1
Where e is the number 2.71828
5-61
5-62
Key Terms
5-63
5-64