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1.4 Week 2 Lect 1 TVM - Part 2 Shortcuts Students

# 1.4 Week 2 Lect 1 TVM - Part 2 Shortcuts Students - TVMpt2...

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TVM pt 2 Week 2 Lecture 1

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Time Value of Money The most important concept in finance Used in nearly every financial decision Business decisions Personal finance decisions
Hint: ALWAYS, Always, Always: Draw Time Line Bring all CF’s to same  point in time

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Topics Covered Present and Future Values – last lecture Multiple Cash Flows – last lecture Perpetuities and Annuities: level cash flows Perpetuities and Annuities:        growing cash flows
Simplifications/Short Cuts Sometimes there are shortcuts that make it very  easy to calculate the present value of an asset  that pays off in different periods.  These tools  allow us to cut through the calculations quickly.

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PV of Multiple Cash Flows -  PVs can be ________________ to evaluate  multiple cash flows. 1 2 1 2 (1 ) (1 ) .... C C I I PV + + = + +
Perpetuities & Annuities Perpetuity    A stream of _____ cash payments that  __________. Annuity    _________________ stream of cash  flows for _______________  _____________________ .

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Perpetuity: A constant stream of cash flows that ____________. 0 1 C 2 C 3 C 2 3 (1 ) (1 ) (1 ) C C C PV I I I = + + + + + + L
Perpetuities: PV of Perpetuity Formula Pmt = cash payment  I  = interest rate  Pmt I PV =

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Perpetuities Example - Perpetuity In order to create an endowment, which pays \$100,000  per year, forever, how much money must be set aside  today in the rate of interest is 10%?
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