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**or $10,000 in 5 years?
**

Obviously, $10,000 today.

You already recognize that there is TIME

VALUE TO MONEY!!

Why is TIME such an important element

in your decision?

TIME allows you the opportunity to

postpone consumption and earn

INTEREST.

The idea that money available at the present time is

worth more than the same amount in the future due to

its potential earning capacity.

This core principle of finance holds that, provided

money can earn interest, any amount of money is

worth more the sooner it is received.

Risk and Uncertainty

Inflation

Consumption

Investment opportunities

Future value

Present value

Annuities

Amortization

Future value is the value at some future time of a

present amount of money, or a series of payments,

evaluated at a given interest rate.

Where:

FV= future value

P = principal

invested

n = number of years

k = interest rate

1

0

n

n

k) ( PV FV + =

Suppose you incest's 1000 for three years in a saving account that pays 10 per cent

interest per year. If you let your interest income be reinvested, your investment will

grow as follows:

Formula:

In this equation (1 + r)

n

is called the future value interest factor (FVIF). where, FV

n

= Future value of the initial flow n year hence

PV = Initial cash flow

r = Annual rate of Interest

n = number of years

By taking into consideration, the above example, we get the same result.

FV

n

= PV (1 + r)

n

= 1,000 (1.10)

3

FV

n

= 1331

FV

n

=PV(1 +r)

n

Present Value is the current value of a future amount

of money, or a series of payments, evaluated at a

given interest rate.

1

1

) 1 (

0

n

n

n

n

k) (

FV

k

FV

PV

+

× =

+

=

An Annuity represents a series of equal payments (or

receipts) occurring over a specified number of

equidistant periods

Ordinary Annuity: Payments or receipts occur at the

end of each period.

Annuity Due: Payments or receipts occur at the

beginning of each period.

A blended payment loan is repaid in equal periodic payments

However, the amount of principal and interest varies each

period

Assume that we want to calculate an amortization table

showing the amount of principal and interest paid each period

for a $5,000 loan at 10% repaid in three equal annual

instalments.

(

(

(

(

¸

(

¸

+

÷

=

=

k

k) (1

1

1

PMT Principal

) PMT(PVAF Principal

n

n k,

Where:

PMT = the fixed periodic payment

T= the amortization period of the loan

r = the rate of interest on the loan

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