Chapter+4b

Chapter+4b - Chapter 4 (Contd) Time Value of Money Focusing...

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Chapter 4 (Cont’d) Time Value of Money
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2 Fall 2011 Focusing Question Ellen is 35 years old, and she has decided it is time to plan seriously for her retirement. She plans to start saving $10,000 in a retirement account at the end of each year until she is 65. How can Ellen find out how much she will have saved when she is 65?
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3 Fall 2011 Outline Time Value of Money Rules of Time Travel Series of Regular Cash Flows Other Variables Perpetuities Annuities Amount of Cash Flows Number of Periods Rate of Return Series of Growing Cash Flows FV & PV
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4 Fall 2011 Learning Objectives 1. Calculate the present value of a perpetuity. 2. Using financial calculator, calculate the present value of an ordinary annuity and an annuity due. 3. Using financial calculator, calculate the future value of an ordinary annuity and an annuity due. 4. Compute the PV of a growing perpetuity. 5. Compute the number of periods, or amount of the regular cash flows in a loan or investment. 6. Compute the internal rate of return of a series of cash flows, given the present or future value of the cash flows.
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5 Fall 2011 Outline Time Value of Money Rules of Time Travel Series of Regular Cash Flows Other Variables Perpetuities Annuities Amount of Cash Flows Number of Periods Rate of Return Series of Growing Cash Flows FV & PV
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6 Fall 2011 Perpetuities Example 4.6 Timeline: PV = $30,000 / 0.08 = $375,000 today PV?
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7 Perpetuities a constant cash flow that will occur at regular intervals forever Present Value of a Perpetuity let n infinity with r > 0 ( in perpetuity) = C PV C r 0 0 ( ) (1 ) = = = = + ∑∑ NN n n n nn C PV PV C r
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8 Fall 2011 Annuities An ordinary annuity is a stream of N equal cash flows paid at regular intervals, with the first CF starting one period from now. Unlike a perpetuity, an annuity ends after some fixed number of payments
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9 Fall 2011 PV of Annuities Example 4.7 Plan: Construct the timeline of option (a) Compute how much the cash flows are worth in today’s dollar. Compare with option (b) PV?
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10 Fall 2011 PV of Annuities Execute: Financial Calculator Solution of Ordinary Annuity : $15 million > $12.16 million, so take the lump sum.
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Chapter+4b - Chapter 4 (Contd) Time Value of Money Focusing...

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