073 3440 fvad3 10001072 10001071 1225

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Unformatted text preview: (FVIFA7%,3)(1.07) = $1,000 (3.215)(1.07) = $3,440 Period 6% 7% 8% 1 1.000 1.000 1.000 2 2.060 2.070 2.080 3 3.184 3.215 3.246 4 4.375 4.440 4.506 5 5.637 5.751 5.867 FVADn FVAD3 39 Certified Financial Controller CFC Overview of an Ordinary Annuity -- PVA Cash flows occur at the end of the period 0 1 2 i% n n+1 n+ ... R R R R = Periodic Cash Flow PVAn PVAn = R/(1+i)1 + R/(1+i)2 + ... + R/(1+i)n 40 Certified Financial Controller CFC 20 Example of an Ordinary Annuity -- PVA Cash flows occur at the end of the period 0 1 2 3 $1,000 4 $1,000 7% $1,000 $934.58 $873.44 $816.30 $2,624.32 = PVA3 624. 41 PVA3 = $1,000/(1.07)1 + $1,000/(1.07)2 + $1,000/(1.07)3 = $934.58 + $873.44 + $816.30 = $2,624.32 624. Certified Financial Controller CFC Hint on Annuity Valuation The present value of an ordinary present value an ordinary annuity can be viewed as beginning occurring at the beginning of the first cash flow period, whereas the future value of an annuity due can be viewed as occurring end at the end of the first cash flow period. 42 Certified Financial Controller CFC 21 Valuation Using Table IV = R (PVIFAi%,n) = $1,000 (PVIFA7%,3) = $1,000 (2.624) = $2,624 Period 6% 7% 8% 1 0.943 0.935 0.926 2 1.833 1.808 1.783 3 2.673 2.624 2.577 4 3.465 3.387 3.312 5 4.212 4.100 3.993 PVAn PVA3 43 Certified Financial Controller CFC Overview of an Annuity Due -- PVAD Cash flows occur at the beginning of the period 0 1 2 i% R n-1 n ... R R R R: Periodic Cash Flow PVADn PVADn = R/(1+i)0 + R/(1+i)1 + ... + R/(1+i)n-1 = PVAn (1+i) 44 Certified Financial Controller CFC 22 Example of an Annuity Due -- PVAD Cash flows occur at the beginning of the period 0 1 2 $1,000 3 4 $1,000 7% $1,000.00 $ 934.58 $ 873.44 $2,808.02 = PVADn 808. PVADn = $1,000/(1.07)0 + $1,000/(1.07)1 + $1,000/(1.07)2 = $2,808.02 808. 45 Certified Financial Controller CFC Valuation Using Table IV PVADn = R (PVIFAi%,n)(1+i) PVAD3 = $1,000 (PVIFA7%,3)(1.07) = $1,000 (2.624)(1.07) = $2,808 Period 6% 7% 8% 1 0.943 0.935 0.926 2 1.833 1.808 1.783 3 2.673 2.624 2.577 4 3.465 3.387 3.312 5 4.212 4.100 3.993 46 Certified Financial Controller CFC 23 Steps to Solve Time Value of Money Problems 1. Read problem thoroughly 2. Create a time line 3. Put cash flows and arrows on time line 4. Determine if it is a PV or FV problem 5. Determine if solution involves a single CF, annuity stream(s), or mixed flow 6. Solve the problem 7. Check with financial calculator (optional) 47 Certified Financial Controller CFC Mixed Mixed Flows Example Julie Miller will receive the set of cash flows below. What is the Present Value at a discount rate of 10%. 10% 0 1 10% $600 2 3 5 $600 $400 $400 $100 PV0 48 4 Certified Financial Controller CFC 24 How to Solve? 1. Solve a “piece-at-a-time” by piece-atdiscounting each piece back to t=0. piece 2. Solve a “group-at-a-time” by first group-atbreaking problem into groups of annuity streams and any single cash flow groups. Then discount each group back to t=0. group 49 Certified Financial Controller CFC “Piece-At“Piece-At-A-Time” 0 1 10% $600 2 3 4 $600 $400 $400 $100 $545.45 545. $495.87 495. $300.53 300. $273.21 273. $ 62.09 62. $1677.15 = PV0 of the Mixed Flow 1677. 50 5 Certified Financial Controller CFC 25 “Group-At“Group-At-A-Time” (#1) (#1 0 1 2 3 4 5 10% $600 $600 $400 $400 $100 $1,041.60 041. $ 573.57 573. $ 62...
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This note was uploaded on 05/28/2013 for the course FINANCE economy taught by Professor Nill during the Fall '12 term at Bronx School Of Law And Finance.

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