# Financial Management

Essay by rakeshcalton April 2007

A. Compound Interest Formula:FV = P (1 + r) nFuture Value = FV, P = Principal, r = interest rate and n = number of years.

= \$500(1 + 0.06) 10a) An initial \$500 compounded for 10 years at 6 percent.

A = \$ 895b) An initial \$500 compounded for 10 years at 12 percent.

500(1 + 0.12) 10B = \$1553Present Value Calculation:PV = present Value, Principal = \$ 500, r = interest rate and n = number of yearsFormula:PV = FV/(1 + r) nThe present value of \$500 due in 10 years at a 6 percent discount rate.

PV = \$ 500 / (1 + 0.06) 10c) The present value of \$500 due in 10 years at a 6 percent discount rate.

C = \$ 279.20d) The present value of \$1,552.90 due in 10 years at a 12 percent discount rate and at a 6 percent rate.

At 6 % = \$ 867.13At

12 % = \$ 499.99Definition of Present valueThe free dictionary defines Present Value as, ÃÂÃÂThe amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future. To determine the present value, each future cash flow is multiplied by a present value factor. For example, if the opportunity cost of funds is 6%, the present value of \$500 to be received in ten year is \$ 500 /(1 + 0.06) 10 = \$ 279.20 For \$ 1552.90 due in 10 years at a 12 percent discount rate and at a 6 percent rate. The present value is \$ 867.13 % and \$ 499.99 respectively.

B Future Value of an Annuity:The Future Value of an Ordinary Annuity (FVoa) is the value that a stream of expected or promised future payments will grow to after a...