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FIN 370 Week 2 DQ 3 -

Time value of money is one of the most important concepts in finance. The basic premise of time value of money problems is that time impacts the value of a dollar. That is, a dollar received today is worth more than one received in the future. The principles of time value of money are used in a variety of applications in finance, including capital budgeting, capital structure, cost of capital, and working capital management decisions.

This chapter explores time value of money concepts as they apply to a lump sum or single cash flow. Future value is the value of a sum of money compounded at a given interest rate for a specific period of time. Present value is the current value of a sum of money to be received at a specified time in the future, given a stated rate of interest.

1. What is compound interest and how is it calculated?

2. Describe the three basic approaches that can be used to move money through time.

3. How does increasing the number of compounding periods affect the future value of a cash sum?