Analytical Methods for Lawyers (Finance) Future value [last updated 6 Apr 09]

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Presentation transcript:

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 Invest $50010%Balance Year 1 Year 2 Year 3 $50.00 $55.00 $60.50 $ $ $665.50

Time value of money Invest $50010%Balance Year 1 Year 2 Year 3 $50.00 $55.00 $60.50 $ $ $ $800 in 3 years > $500 today (assuming a 10% rate for money)

Time value of money Invest $50020%Balance Year 1 Year 2 Year 3 $ $ $ $ $ $864.00

Time value of money Invest $50020%Balance Year 1 Year 2 Year 3 $ $ $ $ $ $ $500 today > $800 in 3 years (assuming a 20% rate for money)

Time value of money Invest $50020%Balance Year 1 Year 2 Year 3 $ $ $ $ $ $ $500 * (1+.20) 3 = $864

Future value FV = PV * (1+ i) n 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 of dollar cost averaging? (an annuity - $5,000 for 10 7%) Law & Valuation “Future value of annuity”

The end