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Financial Series Analysis: Calculating Cash Flows with Effective Interest Rate

Learn how to determine the relationship between present and compound values in financial series analysis. Discover the steps to calculate accumulated amounts over time using interest rates and regular deposits.

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Financial Series Analysis: Calculating Cash Flows with Effective Interest Rate

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  1. For series cash flows, first step is to determine relationship between PP and CP When PP>=CP, the only procedure(2 steps) that can be used is as follows: Example: How much money will be accumulated in 10 years from a deposit of $500 every 6 months if the interest rate is 1% per month? Series With PP>=CP (1) First, find effective i per PP (ex: if PP is quarters, must find effective i/quarter (2) Then, determine n, where n is equal to the no. of A values involved (ex: quarterly payments for six years yields n = 24) Solution: Since PP>CP, first step is to find effective i per PP (six months): i /6 mos. = (1 + 0.06 /6)6 – 1 = 6.15% Next step is to determine n: n = 10(2) = 20 Now, F = 500(F/A,6.15%,20) = $18,692 (Excel)

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