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Time Value of Money

Discover the fundamental concepts of money's time value, including the future value (FV) and present value (PV) of investments. Learn how to calculate the FV of an investment compounded with interest over time, using formulas like FV = principal x (1 + interest)^years. For instance, the FV of $5,000 at 5% interest over 5 years is $6,700. Furthermore, explore how to determine the current worth of future cash flows by calculating PV using the formula PV = principal / (1 + interest)^years, such as finding the PV of $10,000 at 4% interest over 4 years.

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Time Value of Money

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  1. Time Value of Money

  2. Future Value of Money • The value of an investment after it has been compounded with interest for a specific period of time • FV = principle (1 + interest) years • FV of $5,000 in 5 years if interest is %5? • FV = 5,000 (1.05)5 • FV = 5,000 (1.34) • FV = $6,700

  3. Present Value of Money • The current value of an investment after it has been discounted • PV = Principle ( 1_____) • ( 1 + interest)years • PV of $10,000 if interest is %4 and time is 4 years • PV = 10,000 (_____1____) • (1 + .04 )4 • PV = 10,000 (.8219) = 8,219

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