ECN437Present Value 1- Fundamentals

# ECN437Present Value 1- Fundamentals - ECN437...

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ECN437 Present Value 1: Fundamentals Here are the key equations for doing present value calculations. A single payment The present value of a single payment of B dollars in year T when the  interest rate is R is given by the formula: PV = B/(1+R) T The cash flow diagram that corresponds to this case is: A series of payments The present value of a series of payments is just the sum of the present  values of the individual payments. For example, the PV of a sequence of  payments of B1 dollars in year 1, B2 dollars in year 2, zero dollars in year 3  and B4 dollars in year 4 would be: PV = B1/(1+R) + B2/(1+R) 2  + B4/(1+R) 4 The cash flow diagram that corresponds to this case is: An infinite series of payments The present value of receiving B dollars per year forever starting one year  from now is: PV = B/R The cash flow diagram that corresponds to this case is:

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ECN437Present Value 1- Fundamentals - ECN437...

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