Principles of Managerial Finance

158 PART 2 Important Financial Concepts

30.00

25.00

20.00

15.00

10.00

5.00

1.00

0 2 4 6 8 10 12 14 16 18 20 22 24

Periods

Future Value of One Dollar ($)

20%

15%

10%

5%

0%

6. The calculator differentiates inflows from outflows by preceding the outflows with a negative sign. For example,
   in the problem just demonstrated, the $800 present value (PV), because it was keyed as a positive number (800), is
   considered an inflow or deposit. Therefore, the calculated future value (FV) of 1,070.58 is preceded by a minus
   sign to show that it is the resulting outflow or withdrawal. Had the $800 present value been keyed in as a negative
   number (800), the future value of $1,070.58 would have been displayed as a positive number (1,070.58). Simply
   stated, the cash flows— present value (PV) and future value(FV)—will have opposite signs.

FIGURE 4.5

Future Value
Relationship
Interest rates, time periods,
and future value of one
dollar

many calculators, this value will be preceded by a minus sign (1,070.58). If a

minus sign appears on your calculator, ignore it here as well as in all other “Cal-

culator Use” illustrations in this text.^6

Because the calculator is more accurate than the future value factors, which

have been rounded to the nearest 0.001, a slight difference—in this case, $0.18—

will frequently exist between the values found by these alternative methods.

Clearly, the improved accuracy and ease of calculation tend to favor the use of

the calculator. (Note:In future examples of calculator use, we will use only a dis-

play similar to that shown on the preceding page. If you need a reminder of the

procedures involved, go back and review the preceding paragraph.)

Spreadsheet Use The future value of the single amount also can be calculated as

shown on the following Excel spreadsheet.

A Graphical View of Future Value

Remember that we measure future value at the endof the given period. Figure 4.5

illustrates the relationship among various interest rates, the number of periods

interest is earned, and the future value of one dollar. The figure shows that (1) the