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Lecture IV: Bussey Chapter 3 and Annualized Cost
I.
Bussey, Chapter 3
A. Page 3334 gives a review of perfect market assumptions and the
consumption basis of financial analysis.
1. Wealth is defined for the purpose of this class as the present value of
the net cash flows owned by the individual.
a. If the individual has an initial endowment
{ }
0
1
t
t
Y
∞
=
, that individual’s
wealth can be defined as:
( 29
0
0
1
N
t
t
t
Y
W
r
=
=
+
∑
.
b. If the individual adds an investment with a positive NPV, his
wealth becomes
( 29
( 29
0
00
11
NN
tt
YY
W
rr
==
′
′
=+
++
∑∑
Note that by assumption, an individual will only add projects with
a positive NPV.
See Hirshliefer pp. 4756.
2. Simple interest formula
10
0
WW
i
W

=
B. Bussey 3.1.4. pp. 4042 gives some overview of a general equilibrium
savings/investment concept.
C. Formulas for discrete formulation
1. Future value of an ordinary annuity
( 29
N
i
F
V
PMT
i
+
=
2. Present value of an annuity
( 29
1
1
1
N
i
P
V
PMT
i

+
=
Relationship between formulas
( 29
( 29
( 29
12
0
2
1
N
N
NCF
NC
F
NCF
P
V
NCF
r
+
L
Finding the future value (FV) of the investment stream assuming that
the returns are invested at the marginal cost of capital
( 29 ( 29 ( 29
0
1
N
N
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This note was uploaded on 07/15/2011 for the course AEB 6145 taught by Professor Moss during the Spring '11 term at University of Florida.
 Spring '11
 Moss

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