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MGMT310_lecture7

# MGMT310_lecture7 - Last Lasttimewediscussed E.g,...

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Last time we discussed… Present value of multiple cash flows E.g., what is present value of T year annuity making C dollar payments Future value of multiple cash flows E.g., how much money can you have in T years if you put away C dollars a year? So far, we’ve only look at a finite # of cash flows… but what if you have an infinite number of cash flows?

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Infinite identical cash flows Let’s say you are promised \$5 a year FOREVER. The payments start next year, and the relevant discount rate is 10%. What is the present value of all future cash flows? Let’s pose this question another way: Suppose your bank promises you an interest rate of 10% annually on your deposits. This mean, if you leave X dollars in the bank forever you can pull out 10% * X dollars each year , you can pull out 10% * X dollars each year forever . If you want to be able to pull out \$5 a year forever, how much (\$X) do you have to leave in the bank forever?
Perpetuity A perpetuity is a constant stream of cash flows forever (i.e., an annuity with no end date). Perpetuity PV C As with the Annuity PV formula, we t b i f Let’s say an investment will pay \$10 per year forever starting r assume payments begin one year from today (or, equivalently, at end of year) Let’s say an investment will pay \$10 per year forever, starting next year. The relevant discount rate is 10%. What is the present value of this investment?

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