MBA711%20-%20Chpt%205%20-%20TVM%20-%20classnotes

MBA711%20-%20Chpt%205%20-%20TVM%20-%20classnotes - Chapter...

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Chapter 5 Time Value of Money 2: Analyzing Annuity Cash Flows 1. Future Value of Multiple Cash Flows 2. Future Value of an Annuity 3. Present Value of an Annuity 4. Perpetuities 5. Other Compounding Periods 6. Effective Annual Rates (EAR) 7. Amortized Loans Future Value of Multiple Cash Flows i = 10% 0 1 2 3 4 5 6 /))))))3))))))3))))))3))))))3))))))3))))))1 $1,000 $500 $500 $500 $500 $750 0 1 2 3 4 5 6 $1,000 $500 $500 $500 $500 $ 750 $ 5 5 0 $ 605 $ 665.50 $ 732.05 $1,610.51 $4,913.06 Future Value of an Ordinary Annuity Annuity - A series of payments of a fixed amount for a specified number of periods of equal length Ordinary Annuity - An annuity where the first payment occurs at the end of period ex. Future Value of an Ordinary Annuity - $1,000/year, for 5 years at 12% 0 1 2 3 4 5 $1,000 $1,000 $1,000 $1,000 $1,000 5 F V =
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How to Solve?? Take FV of each payment at 12%. 0 1 2 3 4 5 $1,000 $1,000 $1,000 $1,000 $1,000 $ 1 , 1 2 0 . 0 0 $ 1 , 2 5 4 . 4 0 $ 1 , 4 0 4 . 9 3 $ 1 , 5 7 3 . 5 2 $ 6 , 3 5 2 . 8 5 (1) Equation FV = PMT * ( 1 + i ) - 1 = $1,000 * ( 1.12 ) - 1 t 5 i .12 = $1,000 * 6.3528 = $6,352.80 (2) Calculator PMT=1000, N=5, I=12%, cpt FV = 6,352.85 Future Value of an Annuity Due Annuity Due - An annuity where the first payment is at the beginning of the period ex. annuity due = $1,000/ year for 5 years at 12% 0 1 2 3 4 5 $1,000 $1,000 $1,000 $1,000 $1,000 $ 1 , 1 2 0 . 0 0 $ 1 , 2 5 4 . 4 0 $ 1 , 4 0 4 . 9 3 $ 1 , 5 7 3 . 5 2 $ 1 , 7 6 2 . 3 4 $ 7 , 1 1 5 . 4 0
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(1) Equation FV = PMT * (1+i) - 1 * (1+i) = 1000 * (1.12) - 1 * (1.12) N5 i .12 = $1,000 * 6.3528 * 1.12 = $7,11540 (2) Calculator BEG mode PMT=1000, I=12%, N=5, cpt FV = 7,115.19 Present Value of an Ordinary Annuity ex. Present Value of an Ordinary Annuity - $1,000/year, for 5 years at 12% (1) Equation: (2) Calculator: PMT=1,000, N=5, I=12%, cpt PV=3,604.78
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This note was uploaded on 11/20/2009 for the course MBA financial taught by Professor Ibraheem during the Spring '09 term at Dubai Aerospace Enterprise University.

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MBA711%20-%20Chpt%205%20-%20TVM%20-%20classnotes - Chapter...

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