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Unformatted text preview: Net Present Value and Inflation IEMS 326 Lecture 2 Review: Discount Rate • m periods in a year • d = annual discount rate • r = discount rate per period • The 1year discount factor 1/(1+d) = 1/(1+r) m , i.e. d = (1+r) m  1 and r = (1+d) 1/m – 1 • The present value of a cashflow y arriving in n periods, i.e. at time t = n/m (in years) is y(1+r)n = y(1+d)n/m = y(1+d)t Present Value: Multiple Payments • For a small number of multiple payments, compute the PV of each and add. • For a perpetuity of C received every period, starting in 1 period, PV is C/r. • For an annuity of C received at periods 1, 2, …, n, PV is (C/r)(1  (1+r)n ). Present Value Examples • Use discount rate 12% for all examples. • Present value of $100 received in 1.5 years. • PV of $1 per month forever. • PV of $1 per month for 8 months. • Present value formulae: – y(1+d)t for y in t yrs – C/r for C every period – (C/r)(1  (1+r)t ) for C at each of t periods Present Value Examples • Present value of $100 discounted at 12% over 1.5 years. – ($100)(1.12)1.5 = $84.37 • PV of $1 per month forever at 12%: – r = (1.12) 1/12 – 1 = 0.95% – ($1)/0.0095 = $105.39 • PV of $1 per month for 8 months at 12%. – ($1/.0095)(1 – (1.12)8/12 ) = $7.67 – ($1/.0095)(1 – (1.0095)8 ) = $7.67 Net Present Value (NPV) • The present value (PV) of a cashflow stream is the sum of the PVs of all cashflows....
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This note was uploaded on 04/07/2008 for the course IEMS 326 taught by Professor Staum during the Winter '07 term at Northwestern.
 Winter '07
 STAUM

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