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| To the amount of money an investment will grow to over some period of time at some given interest rate; cash value of an investment at sometime in the future |
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| Principal; In general, if you invest for one period at an interest rate of r, you investment will grow to (1 plus r) per dollar invested. |
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| Investing for More than 1 period |
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| Four parts of investing for more than 1 period |
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1. is original principal
2. is interest you earn in the first year
3. is interest you earn in the second year
4? |
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| The process of accumulating interest in an investment overtime to earn more interest |
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| Formula (investing for more than 1 period) |
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| interest earned on the reinvestment of previous interest payment |
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| Interest earned on both the initial principal and the interest reinvested from prior period |
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| Compound interest gets bigger every year |
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| Because more and more interest builds up and there is thus more compound |
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| we need to come up with the relevant fv factor |
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| The current value of future cash flows discounted at the appropriate discount rate |
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| Calculate the present value of some future amount |
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| PV=$1 *[1/(1+r)]=$1/(1+r) |
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| PV=$1 X [1/(1+r)t]=$1/(1+r)t |
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| the rate used to calculate the present value of future cash flows |
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| Discount cash flow (DCF) valuation |
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| Valuation calculating present value of a future cash flow to determine its value today |
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