Finding the Number of Periods

Suppose we are interested in purchasing an asset that costs $50,000. We currently have $25,000. If we can earn 12 percent on this $25,000, how long until we have the $50,000? Finding the answer involves solving for the last variable in the basic present

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

III. Valuation of Future Cash Flows

5. Introduction to Valuation: The Time Value of Money

© The McGraw-Hill Companies, 2002

CHAPTER 5 Introduction to Valuation: The Time Value of Money value equation, the number of periods. You already know how to get an approximate answer to this particular problem. Notice that we need to double our money. From the Rule of 72, this will take about 72/12 = 6 years at 12 percent.

To come up with the exact answer, we can again manipulate the basic present value equation. The present value is $25,000, and the future value is $50,000. With a 12 percent discount rate, the basic equation takes one of the following forms:

We thus have a future value factor of 2 for a 12 percent rate. We now need to solve for '. If you look down the column in Table A.1 that corresponds to 12 percent, you will see that a future value factor of 1.9738 occurs at six periods. It will thus take about six years, as we calculated. To get the exact answer, we have to explicitly solve for ' (or use a financial calculator). If you do this, you will see that the answer is 6.1163 years, so our approximation was quite close in this case.

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