Discounting Notes

Discounting Notes - Discounting Future Cash Flows Daniel K....

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Discounting Future Cash Flows Daniel K. Saunders 1 Geometric Series 1.1 Perpetuity (Infinitely Many Terms) For a geometric series , let 0 < x < 1. Then the following is true ∞ X n =0 x n = 1 1- x With this fact we can show that . 9999 ... = 1 . First, notice that . 9999 .... = 9 10 + 9 100 + 9 1000 + ... = 9 10 1 + 1 10 + 1 100 + ... Then the series inside of the paranthesis is a geometric series , and we know that ∞ X n =0 1 10 n = 1 1- 1 10 = 1 9 10 = 10 9 Therefore, we are left with . 9999 ... = 9 10 × 10 9 = 1 1.2 Annuity (Finitely Many Terms) With finitely many terms (0 < x < 1) the adjusted result of a geometric series is as follows N- 1 X n =0 x n = 1- x N 1- x Notice that this result is consistent with the infinite case, since lim N →∞ N- 1 X n =0 x n = lim N →∞ 1- x N 1- x = 1 1- x for 0 < x < 1 1 2 Application to Finance 2.1 A Technical Note For this course, we consider the current period ( t = 0) as a separate issue from discounting future values. For example, if you look at the first set of lecture notes regarding the presentfuture values....
View Full Document

This note was uploaded on 01/20/2010 for the course ECON econ134 taught by Professor M. during the Fall '09 term at UCSB.

Page1 / 2

Discounting Notes - Discounting Future Cash Flows Daniel K....

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online