Introduction to Finance

simple interest 
interest earned 
only on the investment’s principal
compounding 
arithmetic process 
whereby an initial value increases 
or grows at a compound interest 
rate over time to reach a value in 
the future
compound interest 
involves 
earning interest on interest in 
addition to interest on the principal 
or initial investment

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C H A PT E R 9 Time Value of Money
where FV is the future value, PV is the present value, 
r
is the interest rate, and 
n
is the number 
of periods in years. For our $1,000 deposit, 8 percent, two-year example, we have,
FV
2
= $1,000(1 + 0.08)
2
= 
$1,000(1.1164)
= 
$1,166.40
= $1,166 (rounded)
If we extend the time period to ten years, the $1,000 deposit would grow to,
FV
10
= $1,000(1 + 0.08)
10
= 
$1,000(2.1589)
= 
$2,158.90
= $2,159 (rounded)
Now that we have set up an equation-based process for fi nding a future value when com-
pounding is involved, we will demonstrate three other methods that could be used to fi nd a 
future value. They include a fi nancial calculator solution, a spreadsheet solution, and a table-
based solution. We will use a similar format for solving other time value of money problems 
throughout the remainder of this chapter.
Texas Instruments (TI) and Hewlett Packard (HP) make two popular types of fi nancial 
calculators. However, they are programmed diff erently.
1
Reference is made to the use of 
TI and HP calculators when discussing calculator solutions throughout the remainder of 
this chapter. Other available fi nancial calculators are usually programmed like either the 
TI or HP calculators. What is important is that if you are going to use a fi nancial calcu-
lator to solve time value of money problems, you must understand how your particular 
calculator works.
Most fi nancial calculators are programmed to readily fi nd future values. Typically, fi n-
ancial calculators will have a present value key (PV), a future value key (FV), a number of 
time periods key (N), an interest rate key (usually designated %i), and a compute key (usually 
designated as CPT). If you have a fi nancial calculator, you can verify the future value result 
for the ten-year example. 
First, clear any values stored in the calculator’s memory. Next, enter 1000 and press the 
PV key (some fi nancial calculators require that you enter the present value amount as a minus 
value because it is an investment, or outfl ow). Then, enter 8 and press the %i key (most fi n-
ancial calculators are programmed so that you enter whole numbers rather than decimals for 
the interest rate). Next, enter 10 for the number of time periods (usually years) and press the 
N key. Finally, press the CPT key followed by the FV key to calculate the future value of 
2,158.93, which rounds to $2,159. Actually, fi nancial calculators are programmed to calculate 
answers to 12 signifi cant digits.