Beruflich Dokumente
Kultur Dokumente
5-1
Learning Goals
LG1 Discuss the role of time value in finance, the use of
computational tools, and the basic patterns of cash
flow.
LG2 Understand the concepts of future value and present
value, their calculation for single amounts, and the
relationship between them.
LG3 Find the future value and the present value of both an
ordinary annuity and an annuity due, and find the
present value of a perpetuity.
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Cash flow
$3,000
$5,000
$4,000
$3,000
$2,000
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Figure 5.1
Time Line
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The Timeline
A timeline is a linear representation of the
timing of potential cash flows.
Drawing a timeline of the cash flows will help
you visualize the financial problem.
(1
r)
(1
r)
n times
(1
r)
(1
r) n
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The general equation for the future value at the end of period n is
FVn = PV
(1 + r)n
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Figure 5.3
Calculator Keys
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FV
PV
Present Value
I/YR
I/YR
Interest Rate per Year
Interest is entered as a percent, not a decimal
N
P/YR
Gold C All
Clears out all TVM registers
Should do between all problems
Check P/YR
# Gold P/YR
Gold
P/YR
Gold DISP #
Gold and [=] button
DISP
Figure 5.2
Compounding and Discounting
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$5,000
x 1.10
$5, 500
x 1.10
$6,050
x 1.10
$6,655
x 1.10
$7,321
x 1.10
$8,053
PV = 5,000
Output:
FV = 8,052.55
10
5,000
I/YR
PV
PMT
FV
-8,052.55
(1 + 0.06)5 = $800
(1.33823) = $1,070.58
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Power of Compounding
Figure 5.4
Future Value Relationship
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FV = 15,000
Output:
PV = 8,375.92
10
I/YR
15,000
PV
-8,375.92
PMT
FV
Alternative Example
Problem
Suppose you are offered an investment that pays
$10,000 in five years. If you expect to earn a 10%
return, what is the value of this investment today?
Output:
PV = 6,209.21
5
10
I/YR
10,000
PV
-6,209.21
PMT
FV
Annuities
An annuity is a stream of equal periodic cash flows, over a
specified time period. These cash flows can be inflows of
returns earned on investments or outflows of funds invested
to earn future returns.
An ordinary (deferred) annuity is an annuity for which the
cash flow occurs at the end of each period
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FV of Annuities: Formulas
FV of an ordinary annuity:
FV of an annuity due:
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Example of FV of an Ordinary
Annuity
2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.
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2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.
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2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.
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2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.
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Then:
30
I/YR
1,000,000
PV
PMT
FV
-12,158,406
Matter of Fact
Kansas truck driver, Donald Damon, got the surprise of his life when
he learned he held the winning ticket for the Powerball lottery drawing
held November 11, 2009. The advertised lottery jackpot was $96.6
million. Damon could have chosen to collect his prize in 30 annual
payments of $3,220,000 (30 $3.22 million = $96.6 million), but
instead he elected to accept a lump sum payment of $48,367,329.08,
roughly half the stated jackpot total.
What is the cut off interest rate that he wont lose out if he accepts the
lump sum payment
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Textbook Example
Alternative Example
Problem
You want to endow a chair for a female professor
of finance at your alma mater. Youd like to
attract a prestigious faculty member, so youd like
the endowment to add $100,000 per year to the
faculty members resources (salary, travel,
databases, etc.) If you expect to earn a rate of
return of 4% annually on the endowment, how
much will you need to donate to fund the chair?
C
r
$100,000
$2,500,000
.04
Growing Perpetuities
Assume you expect the amount of your
perpetual payment to increase at a constant
rate, g.
Textbook Example
Alternative Example
Problem
In Alternative Example, you planned to donate
money to endow a chair at your alma mater to
supplement the salary of a qualified individual by
$100,000 per year. Given an interest rate of 4%
per year, the required donation was $2.5 million.
The University has asked you to increase the
donation to account for the effect of inflation,
which is expected to be 2% per year. How much
will you need to donate to satisfy that request?
C
r
$100,000
$5,000,000
.04 .02
Growing Annuities
The present value of a growing annuity with the
initial cash flow c, growth rate g, and interest
rate r is defined as:
Present Value of a Growing Annuity
PV
1
(r
g)
1
(1
g
r)
PV
Cn
PV (Cn )
n
(1
r )n
CFj
5,000
CFj
8,000
CFj
8,000
CFj
8,000
CFj
I/YR
Gold
NPV
24,890.65
CFj
500
CFj
500
CFj
500
CFj
10
I/YR
Gold
NPV
243.43
$3,000
$2,000
$1,000
Solution
The present value of the benefits is:
3000 / (1.05) + 2000 / (1.05)2 + 1000 / (1.05)3 = 5366.91
CFj
3,000
CFj
2,000
CFj
1,000
CFj
I/YR
Gold
NPV
On a present value
basis, the benefits
exceed the costs
by $366.91.
366.91
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$2,000
$2,000
Solution
1
$2,000
$2,315
x 1.05
x 1.05
x 1.05
x 1.05
x 1.05
$2,000
Or
$2,205
$2,000
x 1.05
$2,000
$2,000
$2,100
$4,100
$2,000
x 1.05
x 1.05
$4,305
$6,305
x 1.05
$6,620
$2,100
$6,620
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Recalculate the example for the Fred Moreno example assuming (1)
semiannual compounding and (2) quarterly compounding.
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Suppose you want to buy a house 5 years from now, and you estimate
that an initial down payment of $30,000 will be required at that time.
To accumulate the $30,000, you will wish to make equal annual endof-year deposits into an account paying annual interest of 6 percent.
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