ECN437PresentValue2

ECN437PresentValue2 - ECN437 Peter J Wilcoxen The Maxwell...

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ECN437 Peter J Wilcoxen The Maxwell School Economics and Public Administration Syracuse University Present Value 2: Combined Forms The fundamental equations for present value (see “Present Value 1: Fundamentals”) can be combined to analyze more complex cash flows. Here are a couple of important special cases. In all examples, the interest rate is given by R. Infinite stream with a delayed start Suppose an infinite stream of equal payments of B dollars begins in year T+1. The cash flow diagram would be: The present value can be computed in two steps. First, the infinite stream is converted to an equivalent lump sum in the year before the first payment arrives—in this case, year T. That’s easy because from year T’s perspective, the stream of payments is very simple: the payment at T+1 occurs 1 year in the future, the payment at T+2 is 2 years in the future, and so on. Thus, from period T’s perspective it’s an infinite stream with payments beginning in one year in the future: From period T’s perspective, therefore, the value of that stream is B/R. Thus, the original
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ECN437PresentValue2 - ECN437 Peter J Wilcoxen The Maxwell...

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