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Chapter 5

Chapter 5. Time Value of Money. 5-1. Learning Objectives. Describe the basic mechanics of the time value of money Perform calculations related to discounting and compounding. 5-2. Terms. Compounding Discounting Compounding or Discounting Rate Future Value Present Value Lump Sum

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Chapter 5

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  1. Chapter 5 Time Value of Money

  2. 5-1 Learning Objectives • Describe the basic mechanics of the time value of money • Perform calculations related to discounting and compounding.

  3. 5-2 Terms • Compounding • Discounting • Compounding or Discounting Rate • Future Value • Present Value • Lump Sum • Annuity

  4. 5-3 Calculations • Future Value of a Lump Sum • Present Value of a Lump Sum • Future Value of an Annuity • Sinking Fund • Future Value of an Annuity Due • Present Value of an Annuity • Mortgage Constant • Present Value of an Annuity Due

  5. 5-4 Future Value of a Lump Sum May B. Wiser invests 10,000 today earning 5%, compounded annually. What is the value of the investment in 5 years? FV5 = 10,000(1.05)5 = $12,762.82

  6. 5-5 Present Value of a Lump Sum May B. Wiser can make an investment that will pay $1,500 at the end of year three. With a discount rate of 6%, what is the present value of the investment? PV = 1500/(1.06)3 = $1259.43

  7. 5-6 Future Value of an Annuity May B. Wiser will receive 1,000 at the end of each year for the next five years. If her investment rate is 6%, what is the future value of this annuity? FVANN5 = 1,000[((1.06)5 -1)/.06] = $5,637.09

  8. 5-8 Sinking Fund If May B. Wiser needs $15,000 at the end of the five years to make a down payment on her dream home, how much must she save each year if she earns 8% on investment funds? Pmt = 15,000[0.8/((1.08)5 -1)] = $2,556.85

  9. 5-9 Future Value of Annuity Due May B. Wiser will receive 1,000 at the beginning of each year for the next five years. If her investment rate is 6%, what is the future value of this annuity due? FVAD5 = 1,000[((1.06)5 -1)/0.6] (1.06) = $5,9750.32

  10. 5-10 Present Value of an Annuity May B. Wiser will receive $1,000 at the end of each year for the next five years. What is the present value of this annuity if the discount rate is 6%? PVANN5 = 1,000[((1.06)5-1)/((0.6)(1.06)5) = $4,2120.36

  11. 5-11 Mortgage Constant May B. Wiser takes a fixed-rate mortgage for $100,000 at 8% for thirty years to buy her dream home. What is her monthly payment? Pmt = 100,000[ ((.08/12)(1+.08/12)360)/((1+.08)360 -1)] = $733.76

  12. 5-12 Present Value of an Annuity Due May B. Wiser will receive $1,000 at the beginning of each year for the next five years. What is the present value of this annuity due if the discount rate is 6%? PVAD5 = 1,000[((1.06)5 -1)/((.06)(1.06)5)](1.06)= $4,465.10

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