Unformatted text preview: r ) Annuity from
(year 1 to year t) (9) PV of annuity Present Value ·
t» ¬ r r 1 r¼ Annuity factor Note that the term in the square bracket is referred to as the annuity factor. Download free ebooks at bookboon.com
15 Corporate Finance Present value and opportunity cost of capital Example: Annuities in home mortgages
- When families finance their consumption the question often is to find a series of cash payments
that provide a given value today, e.g. to finance the purchase of a new home. Suppose the house
costs €300,000 and the initial payment is €50,000. With a 30-year loan and a monthly interest
rate of 0.5 percent what is the appropriate monthly mortgage payment?
The monthly mortgage payment can be found by considering the present value of the loan. The
loan is an annuity where the mortgage payment is the constant cash flow over a 360 month
period (30 years times 12 months = 360 payments):
PV(loan) = mortgage payment · 360-monthly annuity factor
Solving for the mortgage pay...
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