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Tvm Problem

In: Business and Management

Submitted By vandiepen145
Words 2249
Pages 9
Time Value of Money

Compounding – The process of determining the value of a cash flow or series of cash flows at some point in the future when compound interest is applied.

Discounting – The process of finding the present value of a cash flow or series of cash flows; the reverse of compounding.

Time Line – A graphical representation used to show the timing of cash flows. If not otherwise stated, assume that the cash flow(s) occur at the end of the period indicated.

Terminology

PV0 = present value (normally at t = 0)

FVn = future value at the end of n periods

i = interest rate, discount rate, required rate of return, etc.

n = number of periods interest is earned

m = the number of compounding (discounting) periods per year

FVIFi,n = future value interest factor for i and n (Table A-3)

PVIFi,n = present value interest factor for i and n (Table A-1)

FVIFAi,n = future value interest factor for an annuity of n payments at i interest (Table A-4)

PVIFAi,n = present value interest factor for an annuity of n payments at i interest (Table A-2)

FVA = future value of an annuity of n years

PVA = present value of an annuity of n years

PMT = the periodic level (equal) payment or deposit of an annuity

e = Euler’s constant = 2.71828… (repeating decimal; approximately 2.7183)

ln = natural logarithm

EAR = effective annual rate of interest
Solving for the Future Value and Present Value of Lump Sums

Future value of a lump sum (annual compounding) • equation 1(a) on formula sheet

Future value of a lump sum (non-annual compounding) • equation 1(b) on formula sheet

Future value of a lump sum (continuous compounding) • equation 1(c) on

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