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LectureIV

# LectureIV - Lecture IV Bussey Chapter 3 and Annualized Cost...

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1 Lecture IV: Bussey Chapter 3 and Annualized Cost I. Bussey, Chapter 3 A. Page 33-34 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 0 0 1 1 N N t t t t t t Y Y W r r = = ′ = + + + Note that by assumption, an individual will only add projects with a positive NPV. See Hirshliefer pp. 47-56. 2. Simple interest formula 1 0 0 W W i W - = B. Bussey 3.1.4. pp. 40-42 gives some overview of a general equilibrium savings/investment concept. C. Formulas for discrete formulation 1. Future value of an ordinary annuity ( 29 1 1 N i FV PMT i + - = 2. Present value of an annuity ( 29 1 1 1 N i PV PMT i - + = Relationship between formulas ( 29 ( 29 ( 29 1 2 0 2 1 1 1 N N NCF NCF NCF PV NCF r r r = + + + + + + L Finding the future value (FV) of the investment stream assuming that

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