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HOW TO CALCULATE
PRESENT VALUES
2-2
2-1 FUTURE VALUES AND PRESENT VALUES
FV $100 (1 r) t
Example: FV
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2-1 FUTURE VALUES AND PRESENT VALUES
Present va lue = PV
PV = discount factor C1
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2-1 FUTURE VALUES AND PRESENT VALUES
Discount factor = DF = PV of $1
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2-1 FUTURE VALUES AND PRESENT VALUES
PV DF2 C2
PV 1
(1.07) 2
114.49 100
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FIGURE 2.2 PRESENT VALUES WITH
COMPOUNDING
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2-1 FUTURE VALUES AND PRESENT VALUES
PV C1
(1r ) $800, 000
(1.07) $747,664
Step 4: Go ahead if PV of payoff exceeds
investment
NPV $747,664 $700,000
$47,664
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2-1 FUTURE VALUES AND PRESENT VALUES
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ACTIVITY 1
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2-1 FUTURE VALUES AND PRESENT VALUES
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2-1 FUTURE VALUES AND PRESENT VALUES
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FIGURE 2.5 NET PRESENT VALUES
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2-2 PERPETUITIES AND ANNUITIES
Perpetuity
cash flow
PV of cash flow
discount rate
C1
PV0
r
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2-2 PERPETUITIES AND ANNUITIES
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2-2 PERPETUITIES AND ANNUITIES
Example: Tiburon Autos offers payments of $5,000 per year,
at the end of each year for 5 years. If interest rates are 7%,
per year, what is the cost of the car?
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2-2 PERPETUITIES AND ANNUITIES
1 1
PV of annuity C t
r r 1 r
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2-2 PERPETUITIES AND ANNUITIES
Annuity
Example: The state lottery advertises a jackpot
prize of $365 million, paid in 30 yearly
installments of $12.167 million, at the end of
each year. Find the true value of the lottery
prize if interest rates are 6%.
1 1
Lottery Value 12.167 30
.06 .061 .06
Value $167,500,000
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2-2 PERPETUITIES AND ANNUITIES
1 r 1
t
FV of annuity C
r
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2-2 PERPETUITIES AND ANNUITIES
1 .085 1
FV 20,000
.08
$117,332
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2-3 GROWING PERPETUITIES AND ANNUITIES
Ct 1
PVt
rg
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2-3 GROWING PERPETUITIES AND ANNUITIES
1
PV0
.10 .04
$16.667 billion
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2-3 GROWING PERPETUITIES AND ANNUITIES
Growing Annuities
Golf club membership is $5,000 for 1 year, or
$12,750 for three years. Find the better deal
given payment due at the end of the year and
6% expected annual price increase, discount
rate 10%.
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2-4 HOW INTEREST IS PAID AND QUOTED
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2-4 HOW INTEREST IS PAID AND OUTLAID
EAR = (1 + .01)12 1 = r
EAR = (1 + .01) 1 = .1268, or 12.68%
12
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