7.5 Compound Interest and Present Value Mr. Peltier.

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Presentation transcript:

7.5 Compound Interest and Present Value Mr. Peltier

Compound Interest and Present Value Compound Interest Formula: – If P 0 dollars are deposited into an account earning interest at an annual rate of r, compounded M times yearly, then the value of the account after t years is is called the yearly multiplier

Compound Interest and Present Value Continually Compounded Interest formula: – If P 0 dollars are deposited into an account earning interest at an annual rate r, compounded continuously, then the value of the account after t years is

Compound Interest and Present Value EX: A principal of P 0 = ¥ 100,000 is deposited into an account paying 6% interest. Find the balance after 3 years if interest is compounded quarterly and if it is compounded continuously.

Compound Interest and Present Value The concept of present value (PV) is used in business and finance to compare payments made at different times. Assume that there is an interest rate r (continuously compounded) at which an investor can lend or borrow money

Compound Interest and Present Value EX: Is it better to receive $2000 today or $2200 in 2 years? Consider r = 0.03 and r = 0.07

Compound Interest and Present Value EX: Chief Operating Officer Harold Faltermeyer must decide whether to upgrade his company’s computer system. The upgrade costs $400,000 and will save $150,000 a year for the next three years. Is this a good investment if r = 7%?

Assignment P #1-12