02_Time_Value_of_Money-Day_4-2011.02.07

# 02_Time_Value_of_Money-Day_4-2011.02.07 - Time Value of...

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Time Value of Money Day 4: Annuities Thomas Hogan FNAN 301 February 8, 2011

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Agenda Regular annuity Annuities due Annuity + a regular CF
What is an Annuity? An annuity is a series of equal, periodic payments which recur for a finite number of periods. Like a fixed perpetuity, annuity payments must be equal in amount and occur at regular intervals. Unlike a perpetuity, only a limited number of payments occur (rather than payments going on forever). Payments must be constant, not growing.

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Timeline for a Regular Annuity
PV of a Regular Annuity The present value of an annuity can be calculated with a formula or in your calculator. The annuity formula is: PV = C × [{1 – 1/(1+r) t } / r] However, we will not use the formula in this class. All annuity calculations can be done in the calculator using the TVM Solver function. Apps 1. Financial 1. TVM Solver

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Solving in the Calculator We can Solve for the PV of an annuity just as we did for a single CF, but now we use PMT. PV = Cash flow at beginning of investment period PMT = Periodic payment FV = 0 N = Number of payments I = Interest rate END Mode = Payments occur at the end of the period In END Mode, the calculator solves for PV as of time t = 0 and the first payment at time t = 1.
Ex. 1: PV of an Annuity What is the present value of the cash flows associated with leasing a car for 4 years with annual payments of \$5,000 that start in a year if the opportunity cost of capital is 6 percent? Solve for PV. PV = \$17,325.52806 N I PV PMT FV Mode 4 6% ? -5,000 0 END

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If you borrow \$20,000 for 5 years at a rate of 0.6% per month, then what is your monthly payment if your first payment is due in a month and all monthly payments are equal? PMT = \$ -397.91389 N I PV PMT FV Mode 5×12 0.6% 20,000 ? 0 END
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## This note was uploaded on 02/16/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.

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02_Time_Value_of_Money-Day_4-2011.02.07 - Time Value of...

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