Finance School of management Value of Investing $1 at an Interest Rate of 10% Continuing in this manner you will find that the following amounts will be earned 1 Year Simple interest: 0.1 2 Years $1.21 Simple interest: 0.1+0.1=0.2 Compound interest: 0 3 Years $331 4 Years$1.4641 uesTc
6 Finance School of Management Value of Investing $1 at an Interest Rate of 10% – Continuing in this manner you will find that the following amounts will be earned: 1 Year $1.1 Simple interest: 0.1 2 Years $1.21 Simple interest: 0.1+0.1=0.2 Compound interest: 0.01 3 Years $1.331 4 Years $1.4641
Finance School of management Value of s5 Invested More generally, with an investment of $5 at 10% we obtain 1Year$5*(1+0.10) $5.5 2 years$5.5*(1+0.10) 6.05 3 years$6.05*(1+0.10) $6655 4 Years$6.65*(1+0.10) $7.3205 uesTc
7 Finance School of Management Value of $5 Invested – More generally, with an investment of $5 at 10% we obtain 1 Year $5*(1+0.10) $5.5 2 years $5.5*(1+0.10) $6.05 3 years $6.05*(1+0.10) $6.655 4 Years $6.655*(1+0.10) $7.3205
Finance School of management Value of S5 Invested If we can earn 10% interest on the principal $5 en after 4 years F=5×(+0.1)4=72305 uesTc
8 Finance School of Management Value of $5 Invested – If we can earn 10% interest on the principal $5, then after 4 years 5 (1 0.1) 7.2305 4 FV = + =
Finance School of management Future Value of a Lump Sum F=P*(1+) FV with growths from -6%to +6% 3,500 3.000 4% > 1.500 2 Years uesTc
9 Finance School of Management Future Value of a Lump Sum n FV = PV * (1 + i) FV w ith grow ths from -6% to +6% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 0 2 4 6 8 1 0 1 2 1 4 1 6 1 8 2 0 Y ears Future Value of $1000 6 % 4 % 2 % 0 % -2 % -4 % -6 %
Finance School of management Example: Future Value of a Lump sum Your bank offers a cd F=P*(1+i) Certificate of Deposit $1500*(1+0.03) with an interest rate of 3% for a 5 year =$1738.1111245 investments n You wish to invest $1, 500 for 5 years, how PV 1500 much Will your FV investment be worth? Result1738911111 uesTc 10
10 Finance School of Management Example: Future Value of a Lump Sum ❖ Your bank offers a CD (Certificate of Deposit) with an interest rate of 3% for a 5 year investments. ❖ You wish to invest $1,500 for 5 years, how much will your investment be worth? $1738 .1111145 $1500 * (1 0.03) * (1 ) 5 = = + = + n FV PV i n 5 i 3% PV 1,500 FV ? Result 1738.911111