EXAM 2 - Business Finance

quantity in brackets is also called

PV interest factor PVIF(r,t)

Formula for FV

PV(1+r)^t

For the rate of return what rule do you use

Rule of 72

FV

amt. of $ an investment will grow to at a given interest rate

Discounted cash flow valuation (DCF)

calculate PV of a future cash flow to determine worth today

the discount rate is also called

the rate of return

difference between present value and future value?

in Present value 1 is divided by the future value factor aka 1/(1+r)^t

Compounding

leaving your money and any accumulated interest in an investment for more than one period

a dollar received one yr from today has ___ value than a dollar received today

less

another name for compounding

reinvesting interest

when you are doubling your money what is the formula you use

rule of 72 aka 72/r% aka 72/n

For each of the following annuities, calculate the annual cash flow.

solve for PMT

Franklin originally specified that the money should be paid out 100 years after his death and used to train young people. Later, however, after some legal wrangling, it was agreed that the money would be paid out in 1990, 200 years after Franklin's death. By that time, the Pennsylvania bequest had grown to about $2 million; the Massachusetts bequest had grown to $4.5 million. The money was used to fund the Franklin Institutes in Boston and Philadelphia. Assuming that 1,000 pounds sterling was equivalent to 1,000 dollars, what rate of return did the two states earn (the dollar did not become the official U.S. currency until 1792)?

- 1,000 PV, 2 mill FV, 200 N, CPY I/Y = 3.87

You are considering a one-year investment. If you put up $1,250, you will get back $1,350. What rate is this investment paying?

- 1,250 PV, 1,350 FV, 1 N, CPT I/y = 8%

Suppose you need to have $10,000 in 10 years, and you can earn 6.5 percent on your money

-10000 FV, 6.5 I/Y, 10 N, CPT PV = $5,327.26

What will my $2,000 investment grow to if it earns a 6.5 percent return every year for the next six years?

-2000 PV, 6.5 I/Y, 6 N, CPT FV = $2,918

You would like to buy a new automobile. You have $50,000, but the car costs $68,500. If you can earn 9 percent, how much do you have to invest today to buy the car in two years?

-68500 FV, 9 I/y, 2 N, CPT PV =$57655.08 PV - amt you have (50,000) = 7,655.08 short

the present value factor for $1 at 5% compounded annually for 5 years is

.7835

suppose you need $1,000 in three years. You can earn 15 percent on your money

1,000 FV, 15 I/y, 3 N, CPT PV = - $657.52

Present value factor

1/ (1+r)^t

Come try our product. If you do, we'll give you $100 just for coming by!" If you read the fine print, what you find out is that they will give you a savings certificate that will pay you $100 in 25 years or so. If the going interest rate on such certificates is 10 percent per year, how much are they really giving you today?

100 FV, 10 I/y, 25 N, CPT PV = - 9.23

if you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years

133.10

You have been offered an investment that promises to double your money every 10 years. What is the approximate rate of return on the investment?

72/10 = 7.2%

why put a negative in front of the present value?

B/c PV represents cash outflow amt. you give up today to get cash inflow in the future

Calculate PV of future cash flows

Discount Rate

Present value

current value of future cash flows, discounted at appropriate discount rate

used to discount a future cash flow

discount factor

compound interest

earn interest on a reinvestment of an interest payment (interest on interest)

given an investment amount and a set rate of interest, the ____ the time horizon the ____ the future value

longer, greater