ECON
Handout #2

# Handout #2 - PV(2 = 42,000 42,000(1.025(1.12...

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Unformatted text preview: PV(2) = 42,000 + 42,000 * (1+.025)/(1+.12) + 42,0000.025)A2/(1+.12)A2+.. ...+ 42,000(1.025)"t/(1+.12)"t , = z 42,000*(1+.025)Ak/(1+.12)’\k (ﬁom k=0 to k=42) Which is approximately equal to 484,206. When the interest rate shifts 7 percent upwards it cuts the present value of future payments by more than half. Thus, the value of the interest rate and the rate of growth are very important since even a slight shift can dramatically change the present value. Math Note: Though summation is a logically simple way to calculate these values, one can use the geometric series x+x"2+x"3+.. ..xAt to solve for these equations as well. This geometric series is equal to (l—XA(t+l))/(1~X). For the ﬁiture value you can set x=(l+r) and for the present value you can set x=(1 +r)/(1+i). i.e. FV = 42,000(1-(1.025)A(42+1))/(1-(1.025) = 3,177,754. ...
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• Fall '07
• KAMRANY

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