Page 79 - CFA - Day 1 & 2 Course Notes

LOS 6.f: Demonstrate the use of a Session Unit 2: The Time Value of Money
time line in modelling and solving

time value of money problems..

Other Applications of TVM Functions

Example: Calculating the rate of compound growth
Sales at Acme, Inc., for the last five years (in millions) have been €4.5, €5.7, €5.3, €6.9, and €7.1.

What is the compound annual growth rate of sales over the period?

Answer: The five years of sales represent four years of growth. Mathematically, the

compound annual growth rate of sales is (7.1 / 4.5)¼ –1 = 12.1%.

The calculator solution using the TVM keys is:

FV = 7.1; PV = –4.5; N = 4; CPT → I/Y = 12.08%

Note that if sales were 4.5 and grew for four years at an annual compound rate of

12.08%, they would grow to 4.5 (1.1208)4 = 7.1.