Finance and
Accounting/Managerial
Accounting
Investment Analysis
Part 2
Topic outline
Future Value
Present Value
Net Present Value
Payback Period
Future Value versus Present Value
Suppose a firm has an opportunity to spend $15,000 today on some investment that will
produce $17,000 spread out over the next five years as follows:
Is this a wise investment?
To make the right investment decision, managers need to compare the cash flows at a single
point in time.
, When making investment decisions, managers usually calculate present value.
The Future value of a single amount
Future value is the value at a given future date of an amount placed on a deposit
today and earning interest at a specified rate. Found by applying compound interest
over a specified period of time.
Compound interest is interest that is earned on a given deposit and has become part
of the principal at the end of a specified period.
Principal is the amount of money on which interest is paid.
If Fred Moreno places $100 in a savings account paying 8% interest compounded annually,
how much will he have at the end of 1 year?
Future value at the end of year 1 = $100 x (1 + 0,08) = $108
If Fred were to leave this money in the account for another year, how much would he have
at the end of the second year?
Future value at the end of year 2 = $100 x (1 + 0.08) x (1 + 0.08) = $116.64
Future Value of a Single Amount: The Equation for Future Value
We us the following notation for the various inputs:
o FVn = future value at the end of period n
o PV = initial principal, or present value
o r = annual rate of interest paid.
o n = number of periods (typically years) that the money is left on deposit
The general equation for the future value at the end of period n is
Accounting/Managerial
Accounting
Investment Analysis
Part 2
Topic outline
Future Value
Present Value
Net Present Value
Payback Period
Future Value versus Present Value
Suppose a firm has an opportunity to spend $15,000 today on some investment that will
produce $17,000 spread out over the next five years as follows:
Is this a wise investment?
To make the right investment decision, managers need to compare the cash flows at a single
point in time.
, When making investment decisions, managers usually calculate present value.
The Future value of a single amount
Future value is the value at a given future date of an amount placed on a deposit
today and earning interest at a specified rate. Found by applying compound interest
over a specified period of time.
Compound interest is interest that is earned on a given deposit and has become part
of the principal at the end of a specified period.
Principal is the amount of money on which interest is paid.
If Fred Moreno places $100 in a savings account paying 8% interest compounded annually,
how much will he have at the end of 1 year?
Future value at the end of year 1 = $100 x (1 + 0,08) = $108
If Fred were to leave this money in the account for another year, how much would he have
at the end of the second year?
Future value at the end of year 2 = $100 x (1 + 0.08) x (1 + 0.08) = $116.64
Future Value of a Single Amount: The Equation for Future Value
We us the following notation for the various inputs:
o FVn = future value at the end of period n
o PV = initial principal, or present value
o r = annual rate of interest paid.
o n = number of periods (typically years) that the money is left on deposit
The general equation for the future value at the end of period n is
