analytical methods for lawyers (finance)
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Analytical Methods for Lawyers (Finance). Future value [last updated 6 Apr 09]. “The most powerful force in the universe is compound interest”. Value of $1000?. I offer you either $500 today or $800 in three years. Which is better?. Time value of money. Time value of money. - PowerPoint PPT PresentationTRANSCRIPT
Analytical Methodsfor Lawyers (Finance)
Future value
[last updated 6 Apr 09]
“The most powerful force in the universe is compound interest”.
Value of $1000?
I offer you either $500 today or $800 in three years.
Which is better?
Time value of money
Invest $500 10% Balance
Year 1Year 2Year 3
$50.00$55.00$60.50
$550.00$605.00$665.50
Time value of money
Invest $500 10% Balance
Year 1Year 2Year 3
$50.00$55.00$60.50
$550.00$605.00$665.50
$800 in 3 years > $500 today(assuming a 10% rate for money)
Time value of money
Invest $500 20% Balance
Year 1Year 2Year 3
$100.00$120.00$144.00
$600.00$720.00$864.00
Time value of money
Invest $500 20% Balance
Year 1Year 2Year 3
$100.00$120.00$144.00
$600.00$720.00$864.00
$500 today > $800 in 3 years(assuming a 20% rate for money)
Time value of money
Invest $500 20% Balance
Year 1Year 2Year 3
$100.00$120.00$144.00
$600.00$720.00$864.00
$500 * (1+ .20)3 = $864
Future value
FV = PV * (1+ i)n
0 1 2 3 4 56
7
PV
FV
Which is better investment?
Example
How much would a 5-year zero coupon bond face amount $10,000 at 2.5% interest (compounded annually) pay at maturity?
Solution
What is FV ofdollar cost averaging?
(an annuity - $5,000 for 10 years @ 7%)
Law & Valuation 1.2.3 “Future value of annuity”
The end