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Compounding Interest

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- Future Value: determine what your money will be worth in a given number of years.
- Present Value: present day value of an amount that is received at a future.
- Payments: The amount of money you must pay each period on a loan
- Net Present Value: the present value of net cash inflows generated by a project

Future Value on an Investment

BASED ON THE COMPOUND INTEREST FORMULA

annual interest rate(as a decimal)

Principal(amount at start)

time(in years)

amount at the end

number of times per year that interest in compounded

- i:interest rate per compounding period; andn: the number of compounding periods.

Example: An investment consultant tells you that if you invest in a certain contract, you will receive exactly $10,000in one year. How much should you invest in this contract, assuming you demand a 4% return (yield) on your money?

Loan Payments

Decision Rule: Accept the project only if its NPV is positive or zero. Reject the project having negative NPV.