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CHAPTER 10: TIME VALUE OF MONEY, Basic Concept, INTERPOLATION - Coggle…
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Basic Concept
-Annuities
i) Future Value of ordinary annuities calculation:
i) Using formula
- FVA - PMT (1+i)n-1/i
ii) Using table
FVA = PMT (FVIFA i%, n)
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- An annuity is a cash flow in which cash flows are all equal and occur on a regular basis.
- Normal annuity - cash flow occurs at the end of the period
- Annuity Due -cash flow occurs at the beginning of the period.
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-Future value
i)Future value of lump sum
-future value determine the amount that a sum of money invested today will grow to in a given period of time.
-"compounding" is the process of finding a future value.
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-Calculation for Future Value (lump sum)
-By using formula
- FVn = PV (1+i)n
-By using table
- FVn = PV (FVIF i%,n)
-Present value
- Present Value of a Multiple Cash Flow
- The cash flow PV equals the present value of each individual cash flow in the stream.
- Cash flow of PV can also be found by taking FV cash flow and depositing the amount at the appropriate discount rate for the appropriate period of time.
- Calculation:
i) Using formula
- PV = [FV1/(1+i)1]+[FV2/(1+i)2]+[FV3/(1+i)3]+[FV4/(1+i)4]
ii) Using table
- PVn = FV (PVIF 10%,1)+ FV (PVIF 10%,2)+ FV (PVIF 10%,3)+ FV (PVIF 10%,4)
- Present Value of a Lump Sum
-Calculation:
i) Using the fomula
- PVn = FV [1 / (1+i)n ]
ii) Using table
- PVn = FV (PVIF i%,n)
- Current value calculation determines what future cash flows will be received today (time 0).
- Interest rates used to reduce cash flow are generally referred to as discount rates
- The process of determining the right interest rate (i) or the exact timeframe (n).
- Interest (before) + (factor value (before) - calculated factor value) / (factor value (before) - factor value (after) X difference between interest after and before.
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