Chapter+05

# Chapter+05 - Annuities and the Financial Calculator In the...

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Annuities and the Financial Calculator In the previous chapter, the level payment button PMT was always set to zero Now, for annuities, we can use the PMT key to input the annuity payment Example: suppose that \$100 deposits are made at the end of each year for five years. If interest rates are 8 percent per year, the future value of the annuity is: Chapter 5 1

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Another example: Calculate the future value if a \$50 deposit is made every year for 20 years at a 6 percent interest rate INPUT 20 6 0 -50 N I/YR PV PMT FV OUTPUT 1,839.28 INPUT 5 8 0 -100 N I/YR PV PMT FV OUTPUT 586.66 Chapter 5 2
What if the amount deposited doubles to \$100 per year? The future value doubles to \$3,678.56 What if the \$100 is deposited every year for 40 years rather than 20 years? Does the future value double as well? No – remember that the time and interest rate variables are exponentially related to value INPUT 40 6 0 -100 N I/YR PV PMT FV OUTPUT 15,476.20 The future value more than quadruples when the time is doubled in this example Chapter 5 3

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What if the interest rate is doubled from 6 percent to 12 percent? The size of the periodic payments, the number of years invested, and the interest rate significantly impact the future value of an annuity INPUT 40 12 0 -100 N I/YR PV PMT FV OUTPUT Chapter 5 4
Annuity Loans Finding the interest rate Often a business will know the cost of something, as well as the associated cash flows. For example: A piece of equipment costs \$100,000 and provides positive cash flows of \$25,000 for 6 years. What rate of return does this opportunity offer? INPUT 6 -100,000 25,000 0 N I/YR PV PMT FV OUTPUT 12.98 Chapter 5 5

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Important Points to Remember Interest rate and time period must match! Annual periods  annual rate Monthly periods  monthly rate The Sign Convention Cash inflows are positive Cash outflows are negative Chapter 5
Future Values Suppose you have saved \$125,000 and are planning on saving \$2,700 per year for

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## This note was uploaded on 11/04/2011 for the course FIN 101 taught by Professor Staff during the Fall '11 term at Texas State.

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Chapter+05 - Annuities and the Financial Calculator In the...

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