The Time Value of Money
Special Considerations in Time Value Analysis
Patterns of Payment
Time value of money problems may evolve around a number of different payment or receipt patterns
The factor for i
Is then determined by dividing the quoted annual interest rate by the number of compounding periods
To determine n
Multiply the number of years by the number of compounding periods during the year
Determining the Yield on an Investment
Present Value of an Annuity
Same type of approximated or interpolated yield that applied to a single amount can also be applied
PVIFA=PVA/A
Present Value of a Single Amount
The determination of PVIF does not give us the final answer, but it scales down the problem so we may ascertain the answer
PVIF=PV/FV
Present Value
Each individual payment is discounted back to the present and then all of the discounted payments are added up
P[(1-(1+i)^-1/i)]
Formula derived from the original formula for future value
FV[I/(1+i)^n]
Future Value
Annuity
Series of consecutive payments or receipts of equal amount
FVA = P * ([1 + I]^N - 1 )/I
Single Amount
Measure the value of an amount that is allowed to grow at a given interest rate over a period of time
FV = PV(1 + i)^n
