Compounding Interest. How it works…. Concepts. 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
BASED ON THE COMPOUND INTEREST FORMULA
annual interest rate(as a decimal)
Principal(amount at start)
amount at the end
number of times per year that interest in compounded
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?
Decision Rule: Accept the project only if its NPV is positive or zero. Reject the project having negative NPV.