FV = PV × (1 + i)ⁿ.
The amount needed today.
Choose the one with the highest figure.
The discount rate.
Interest earned on an investment that is reinvested to earn more interest.
Sum of principal = principal + Interest.
5% per annum.
$1,102.5.
The process of earning profit on an investment that is reinvested to earn even more profit.
FV = PV x (1 + r)^n.
The value at the end of a time period from a sum of money invested.
$1,000.
$52.5.
The time value of money.
PV = FV / (1 + i)^n.
That the interest will not be re-invested period after period.
It becomes part of the principal, and the total sum earns interest in subsequent periods.
A dollar received today is worth more than a dollar received in the future.
NPV = (PVs of all annual net cash inflows + PV of residual value) – initial investment.
It states that money available today is worth more than the same amount in the future due to its potential earning capacity.
$50.
Money grows or increases in value.
The project should be accepted as the firm earns exactly the cost of capital.
Compound interest.
Nominal rate is the stated interest rate, while effective rate accounts for compounding over a period.
$1,000 (1 + 5%)^3.
$1,050.
Cost of capital.
The current value of a future sum of money.
Because it can be invested to earn interest.
The project should be accepted as the firm earns more than the cost of capital.
The process of finding the present value of a future sum of money.
Using the interest earned to increase the principal for future interest calculations.
It is much greater under compound interest calculation.
Compounding.
The project should be rejected as the firm earns less than the cost of capital.
ERR = (1 + i/m) - 1, where i is the nominal interest rate and m is the number of compounding periods.
Interest = Principal x interest rate x number of periods.
FV = PV (1 + i)^n, where PV is present value, i is the interest rate, and n is the number of periods.
PV = FV / (1 + i)^n, where FV is future value, i is the interest rate, and n is the number of periods.