University:
California State University, Northridge
Course:
ECON 160 | Principles of Microeconomics
Academic year:

2024
Views:

362

Pages:

1
Author:

aterizareofn

Present Value analysis is based on the following concepts: Lone Vatue of Money laveste money eums interest (if in a bank account, for example) or some rate of return (if invested in something else Any moneyed on the investment (janterent or other income is immediately reinvested at the same rate of return (antecest) as the original investment Therefore interest is also donteie ewings Compenad inter return. For the papuse of presest value analysis they are the same. From now on, only the tem interest will be used rom, rate of The value of an investment after a designated period of time, given a specific interest rate Esware salne $300ted at 30 fir those years, test is comple Investment intarest interest Tsample year 1 rate samed 100 10% 10 year 2 year 3 110 10% 12:1 Value of investment 121 10% after these years 1331 This is an example of Future Value. I can also be determined by saing the compound interest formula (future vahie Formulas: Compound Interest fortouis ar future valore farmula (1) Wherer interest rate per compounding period and in the number of compounding periode (1+1)3 equals 1.331 Inment can be sempounded analyse annually, quarterly, em daily. However, if you are told that you can earn 10% can invest and that twill be compoundedrally, that does act mean that you will sam 10 year on your ent Instead you will wam 2 mice Ayem. If anest were comptes quarterty, you would eam 2.5t four times year, et in otefteris more than con compounding geniod per year the echerest rate for samsted try the number of comprosling pennds per year. The somber of years are multiplied by the cuesber of pepe year, sesulting is a properly adjusted value for For example 10%, yes, quarterly (1+1/2) 3x2 Vale Formula (1+1/4) 34 this in-written as follows Vou the above case FV (10%, 3)-1.331 15100 ат то%, сотречесво гемату и увechtsbeword then of 100FV(10%3)-X 100x1331-X $133 10-X