Beruflich Dokumente
Kultur Dokumente
2 - Time Value of
Money
Topics Covered
Future Values
Present Values
Multiple Cash Flows
Perpetuities and Annuities
Non-annual interest compounding
Future Values
Future Value - Amount to which an investment
will grow after earning interest.
Compound Interest - Interest earned on
interest.
Simple Interest - Interest earned only on the
original investment.
FV PV (1 i)
10
Present Value
Today's value of a lump sum received at a future point in
time:
FVn PV 1 i
PV
FVn
(1 i )
n
11
12
13
14
1.00
0%
0.75
0.5
5%
0.25
10%
15%
20%
0 2 4 6 8 10 12 14 16 18 20 22 24
Periods
15
16
17
18
4
19
Annuities
Annuity: a sequence of equal cash flows,
0
PV
4
FV20
21
Annuity-due
A sequence of periodic cash flows occurring
0
PV
4
FV22
Examples of Annuities-due
Monthly Rent payments: due at the beginning
of each month.
Car lease payments.
Cable & Satellite TV and most internet
service bills.
23
i%
Annuity Due
0
PMT
i%
PMT
PMT
PMT
PMT
PMT
24
INPUTS
OUTPUT
10
-100
I/YR
PV
PMT
FV
331
25
INPUTS
OUTPUT
10
I/YR
PV
100
PMT
FV
-248.69
26
period.
FVAdue= FVAord(1+I) = $331(1.10) = $364.10.
Alternatively, set calculator to BEGIN mode and
solve for the FV of the annuity:
BEGI
N
INPUTS
OUTPUT
10
-100
I/YR
PV
PMT
FV
364.10
27
period.
PVAdue= PVAord(1+I) = $248.69(1.10) = $273.55.
Alternatively, set calculator to BEGIN mode and solve for
the PV of the annuity:
BEGI
N
INPUTS
OUTPUT
10
I/YR
PV
100
PMT
FV
-273.55
28
Annuities
Applications
Value of payments
Implied interest rate for an annuity
Calculation of periodic payments
Mortgage payment
Annual income from an investment payout
Future Value of annual payments
29
30
A) Start at age 44
31
B) Start at age 22
32
INPUTS
OUTPUT
21
I/YR
PV
1,058,030
PMT
FV
-18,639
33
34
35
36
37
Perpetuities
Suppose you will receive a fixed payment
PV
PMT
i
PV
15 ,PV
000
.05
15, 000
.05
$300,000
$300,000
39
100
300
300
-50
10%
90.91
247.93
225.39
-34.15
530.08 = PV
40
CF0 = 0
CF1 = 100
CF2 = 300
CF3 = 300
CF4 = -50
41
42
43
10.00%
10.38%
10.47%
10.52%
45
46
Single CF
FVnm = PV(1 + inom/m)nm
PV = FVnm/(1 + inom/m)nm
Annuities:
Use periodic rate and number of annuity payment and
compounding periods if interest compounding period and
annuity payment period are the same.
Otherwise, need to find effective interest rate for each annuity
payment period.
47
I NOM M N
FVn PV ( 1
)
M
0.10 2 3
FV3S $100( 1
)
2
6
FV3S $100(1.05) $134.01
FV3Q $100(1.025)12 $134.49
48
49
50
Monthly Payments
51
Indifference APR
52