BUSI 530 Chapter Notes - Chapter 5: Cash Flow, Interest, Interest Rate
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Future value (fv: amount to which an investment will grow after earning interest. Fv=. 00 (present investment) + simple annual interest percentage (presented as a decimal) Interest earned only on the original investment, no interest is earned on interest. Compound growth means that value increases each period by the factor (1 + growth rate). The value after t periods will equal the initial value times (1 + growth rate)^t. When money is invested at compound interest, the growth rate is the interest rate . A dollar today is worth more than a dollar tomorrow . Present value (pv: value of a future cash flow stated in today"s dollars, value today of a future cash flow. Discounted cash flow (dcf: method of calculating present value by discounting future cash flows. Interest rate used to compute present values of future cash flows. You should never compare cash flows occurring at different times without first discounting them to a common date.
