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Financial Calculations: Compounding, Present Value, and Annuities, Slides of Fundamentals of E-Commerce

Aligarh Muslim University Fundamentals of E-Commerce

Information on using a financial calculator for compounding, calculating present value, and understanding annuities. It includes examples and equations for determining future values and present values, as well as the importance of interest rates and the power of time in compounding. The document also mentions the discrepancy between tables and calculators due to rounding errors.

Typology: Slides

2012/2013

Uploaded on 07/29/2013

sheil_34 🇮🇳

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The Time Value of a Financial

Calculator (cont’d)

•Step 1 -- input the values of the known

variables.

•Step 2 -- calculate the value of the remaining

unknown variable.

•Note: be sure to set your calculator to “end of

year” and “one payment per year” modes

unless otherwise directed.

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The Time Value of a FinancialCalculator

(cont’d)

-^ Step 1 -- input the values of the knownvariables. •^ Step 2 -- calculate the value of the remainingunknown variable. •^ Note: be sure to set your calculator to “end ofyear” and “one payment per year” modesunless otherwise directed.

Tables Versus Calculator • REMEMBER -- Thetables have adiscrepancy due torounding error;therefore, thecalculator is moreaccurate.

The Power of Time inCompounding Over 35 Years $200,000$150,000$100,000$50,000 $0^ Selma^ Patty

-^ Selma contributed$2,000 per year inyears 1 – 10, or 10years. •^ Patty contributed$2,000 per year inyears 11 – 35, or 25years. •^ Both earned 8%average annualreturn. Docsity.com

The Importance of the InterestRate in Compounding • From 1926-1998 the compound growth rate ofstocks was approximately 11.2%, whereaslong-term corporate bonds only returned5.8%. • The “Daily Double” -- states that you areearning a 100% return compounded on a dailybasis.

Present Value Equation • PV = FV(PVIF)n^ i,n – PV = the present value, in today’s dollars, of a sum ofmoney – FV= the future value of the investment at the end of nn years – PVIF= the present value interest factori,n^ • This equation is used to determine today’s value ofsome future sum of money.

Calculating Present Value for the“Prodigal Son”

If promised $500,000 in 40years, assuming 6% interest,what is the value today?PV = FV(PVIF,)n^ in PV = $500,000 (PVIF6%, 40 yr

) PV = $500,000 (.097)PV = $48,

Compound Annuities • Definition -- depositing an equal sum of money atthe end of each time period for a certain number ofperiods and allowing the money to grow • Example -- saving $50 a month to buy a new stereotwo years in the future – By allowing the money to gain interest and compoundinterest, the first $50, at the end of two years is worth $50^2 (1 + 0.08)= $58.

Future Value of an AnnuityEquation • FV= PMT (FVIFA)n i,n – FV= the future value, in today’s dollars, of a sumn^ of money – PMT = the payment made at the end of each timeperiod – FVIFA= the future-value interest factor for ani,n^ annuity