Chapter4b notes

Chapter4b notes - Chapter 4 (Contd) Time Value of Money...

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Chapter 4 (Cont’d) Time Value of Money
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2 Spring 2010 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 Spring 2010 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 Spring 2010 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.
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5 Spring 2010 Learning Objectives 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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6 Spring 2010 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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7 Spring 2010 Perpetuities Example 4.6 ± Timeline: ± PV = $30,000 / 0.08 = $375,000 today PV?
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8 Spring 2010 Perpetuities ± a constant cash flow that will occur at regular intervals forever ± Present Value of a Perpetuity let n Æ 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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9 Spring 2010 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. ² Unlike a perpetuity, an annuity ends after some fixed number of payments
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10 Spring 2010 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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11 Spring 2010 PV of Annuities Execute: ± Financial Calculator Solution of Ordinary Annuity : ± $15 million > $12.16 million, so take the lump sum.
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This note was uploaded on 08/10/2011 for the course FINA 101 taught by Professor X during the Spring '11 term at HKUST.

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Chapter4b notes - Chapter 4 (Contd) Time Value of Money...

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