ch10_sp11

# ch10_sp11 - BCOR 2000 – Chapter 10 Brief Intro to Present...

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Unformatted text preview: BCOR 2000 – Chapter 10 Brief Intro to Present Value Concepts and Brief Intro to Present Value Concepts and Reporting and Interpreting Bonds Reporting and Interpreting Bonds Brief Intro to Present Value Concepts – Time Value of Money • Basic Idea – \$1 today is worth more than \$1 tomorrow or some future point in time. • How much more? PV = FV ÷ (1 + i) n Where PV = Present Value (today) FV = value at some future time i = discount rate, % (sometimes r) n = compounding periods (time, sometimes t), in same space as i Present Value of a Single Cash Flow (single sum) • What is the present value of \$5,000 received three years from now discounted at 10% per year? Alternatively, how much would you have to invest today to have \$5,000 in three years earning 10% compounded annually ? PV = \$5,000 ÷ (1 + .10) 3 PV = FV ÷ (1 + i) n PV = \$5,000 / 1.331 = \$3,757 Present Value of an Annuity Def Annuity- An even stream of cash flows (same amount every period) What is the present value of \$10,000 to be received in each of the next five years discounted at 8%? PV = \$10K/(1+ 0.08) + \$10K/(1+0.08) 2 + \$10K/(1+0.08) 3 + \$10K/(1+0.08) 4 + \$10K/(1+0.08) 5 Alternatively, use the present value tables , or your financial calculators. Formula: PV(Ann) = PMT x {1 – [1 /(1 + i) n ]} / i PV = \$10K * PVOA(5,8%) = \$10K * 3.9927 = \$39,927 Using present value tables Note correspondence between present value of a single cash flow table (Table A.1 @ end of text or p. 579 in second part of book) and present value of an annuity table (Table A.2 @ end book) and present value of an annuity table (Table A....
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## This note was uploaded on 10/29/2011 for the course BCOR 2000 taught by Professor Brush during the Spring '07 term at Colorado.

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ch10_sp11 - BCOR 2000 – Chapter 10 Brief Intro to Present...

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