Introduction to Valuation: The Time Value of Money - Future Value and Compounding

6 important questions on Introduction to Valuation: The Time Value of Money - Future Value and Compounding

What do the folowing abriviations mean? FV-- FVIF(r,t) -- PV -- r -- t--

FV =  Future value
FVIF(r,t) = Future value interest factor for a sum of money invested at r per cent for t periods
PV = Present value
r = Interest rate or discount rate
t = Number of periods

What means time value of money?

refers to the fact that a euro (or pound) in the hand today is worth more than a euro promised at some time in the future

The amount investment is worth after now or more periods is?

Future value (FV)
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What is compounding and what does it result in?

compounding The process of accumulating interest on an investment over time to earn more interest.

Compounding the interest means earninginterest on interest Interest earned on the reinvestment of previous interest payments. So -->

compound interest Interest earned on both the initial principal and the interest reinvested from prior periods.

What is the difference between single period and more than one period?

1 period ---  $100*1.1=$110
More than one -- picture 130$

What will be our $100 be worth after 5 years?

We can first compute the relevant future value factor as follows: (1+r)t = (1+0.10)high5 = 1.1 hight 5 = 1.6105
OR 1.1Yhighx5=
You 100$ will grow to: 100*1.6105=161.05$

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