Chapter 5 lecture

Xls file worksheet annuity 10 mechanism of fv of

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Unformatted text preview: ransaction costs on buying shares, and a fixed 12% annual return) Reference: File: OtherPracticeProblems_Chp5.xls File: Worksheet: “Annuity” 10 Mechanism of FV of Annuity/ Annuity Due calculation calculation • • • Reference (Example): Reference File: Pfe_chap05.xls Worksheet: “page 85” and “page 86” 11 Present Value FV = PV (1 + r ) n FV PV = , or PV = FV (1 + r ) − n n (1 + r ) • If your dad has promised you \$1,000 upon If graduation, but the graduation is still 2 years away, what is the value of the promise (w/ 5% discount rate)? discount FV 1000 PV = = = \$907.03 n 2 (1 + r ) 1.05 12 Present Value – Same with Excel: Reference (Example): Reference File: Pfe_chap05.xls File: Worksheet: “page 87” 13 Present Value – Present value is inversely related to the Present discount rate discount • When discount rate goes up, PV goes down • Why? Economic value of future payment goes Why? down when interest rate goes up down Reference (Example): Reference File: Pfe_chap05.xls File: Worksheet: “page 88” 14 PV of Annuity • PV of annuity = Sum of PVs for each payment Reference Reference (Example): File: Pfe_chap05.xls Pfe_chap05.xls Worksheet: “page Worksheet: 89” 89” 15 PV of Annuity – Alternative ways (within Excel) to get the Alternative PV of an annuity PV • In a table, calculate each PV and sum them up – See previous slide • Use of PV function – Works similar to the FV function • Use of NPV function – Benefit: can deal with uneven cash flows too 16 The NPV Function – Computes the PV of a series of cash flows • N...
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