Previously
Equations to remember!
Continuous compounding
r m
ie lim 1 1
m
m
er 1
cash flow
start of period 1
end of period 1;
start of period 2
time periods
Equivalence
Mathematical equivalence
Decisional equivalence
Market equivalence
Assumptions
In-class exercise #2
At the end of four years, you would like to have $5000 in a bank account
with which to buy a used car
How much should you deposit in the account now in order to achieve
this?
account pays daily interest
assume 365 days per year
consider interest rates varying from 5% to 15%
Use
F P1 i N
where F = $5000
N = 365 x 4
Hence P = 5000/(1 +
i)N
Interest
Necessary
4500
rate (%)
deposit ($)
0.05
4114
0.06
3957
0.07
3805
0.08
3660
0.09
3520
0.1
3385
0.11
3256
0.12
3131
0.13
3011
0.14
2896
0.15
2785
4000
Necessary
deposit
3500
3000
2500
2000
0.05 0.07 0.09 0.11 0.13 0.15
Conclusions
We now have a basis for comparing the costs of projects when there are
choices about when and how to make payments
this will de developed further in the next section
See also
http://www.getobjects.com/Components/Finance/TVM/concepts.htm
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