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***Rashmi Chaudhary***
Which is more Valuable?
1000 $ now
1000 $ after 2 years
***Rashmi Chaudhary***
Money NOW
is worth more than
money LATER!
***Rashmi Chaudhary***
Future Value Versus Present Value
***Rashmi Chaudhary***
Time Line
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Time Line
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• Future value- value at future date of a
present amount deposited and earning
specified interest rate. (Compounding)
***Rashmi Chaudhary***
***Rashmi Chaudhary***
Types of
Cash Flows
Mixed Stream
Annuities
(a stream of
Single Amounts (a stream of equal
unequal cash
periodic cash flows)
flows )
***Rashmi Chaudhary***
Future value of Single Amount
The General equation for the future value at
end of period n is
FVn= PV X (1+i)n
Where,
FVn= Future value at the end of
period n
PV= Present Value
i= annual rate of interest paid
n= number of periods that money is left
for deposits
***Rashmi Chaudhary***
Example
Jane places $800 in a saving account
paying 6% interest compounded
annually. She wants to know how
much money will be in account at the
end of 5 years.
***Rashmi Chaudhary***
Now in this example
PV = $800, i = 0.06, n = 5
So,
FVn= PV X (1+i)n
FV5= $800 X (1+0.06)5=$1070.40
***Rashmi Chaudhary***
***Rashmi Chaudhary***
Future value Relationship
(Interest rates, time periods, and future value
of one dollar)
***Rashmi Chaudhary***
Present Value of a Single
Amount
***Rashmi Chaudhary***
Example
Pam wishes to find the present value of
$1700 that will be received 8 years from
now. Opportunity cost is 8%
We know,
FVn= PV X (1+i)n
so,
PV= FVn = $1700 = $918.42
(1+i)n (1+8)8
***Rashmi Chaudhary***
***Rashmi Chaudhary***
Comparing Present Value and
Future Value
***Rashmi Chaudhary***
***Rashmi Chaudhary***
***Rashmi Chaudhary***
Types of Annuities
• Ordinary Annuity - • Annuity Due- cash
cash flows occur at flows occur at the
the end of each beginning of each
period period.
***Rashmi Chaudhary***
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Future Value of an Ordinary
Annuity
FVAn=PMT X (FVIAi,n)
***Rashmi Chaudhary***
Frank wishes to determine how much
money he will have at the end of 5
years if he chooses annuity A. i=7%
***Rashmi Chaudhary***
***Rashmi Chaudhary***
Present Value of an ordinary
annuity
PVAn= PMT X (PVIFAi,n)
***Rashmi Chaudhary***
Braden wants to know what
should it most pay to receive $700
at the end of each year
***Rashmi Chaudhary***
***Rashmi Chaudhary***
Annuity Due
FVIAi,n(Annuity due)=
PVIFAi,n(annuity
FVIAi,n X (1+i)
due)= PVIFAi,n X
(1+i)
***Rashmi Chaudhary***
Future value of a Mixed Stream
Shrell expects a stream of mixed cash
flows over the next five years and
expects to earn 8%. What will be
earned after five years if cash flows
are immediately invested.
***Rashmi Chaudhary***
***Rashmi Chaudhary***
***Rashmi Chaudhary***
Present value of a mixed stream
Frey has an opportunity of receving
mixed stream cash flows over 5
years. If he must earn 9%, what is
the most he should pay.
***Rashmi Chaudhary***
***Rashmi Chaudhary***
***Rashmi Chaudhary***
Application of time Value
***Rashmi Chaudhary***
***Rashmi Chaudhary***