FINC19011 – BUSINESS FINANCE-Wk02-2

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Unformatted text preview: ather has agreed to deposit a certain amount of money each year into an account paying 7.25 per cent annually to help you go to university. Starting next year, and for the following 4 years, he plans to deposit $2250, $8150, $7675, $6125, and $12 345 into the account. How much will you have at the end of the 5 years? Solution: Annuity, Perpetuity Level cash flows: annuities Present value of an annuity and perpetuities • Many situations exist where businesses and individuals would face either receiving or paying constant amount for length of period – Annuity – stream of cash flows when company faces stream of constant payments on a bank loan for a period of time – Individual investors may make constant payments on home or car loans, or invest fixed amount year after year saving for retirement Level cash flows: annuities and perpetuities Annuities and perpetuities • Annuity: any financial contract calling for equally spaced level cash flows over finite number of periods – Ordinary annuity: constant cash flows occurring at end of each period – Annuity due: constant cash flows occurring at beginning of each period • Perpetuity: contract calling for cash flow payments to continue forever Annuity Present Value of Ordinary Annuity 1 1− (1 + i / m)m x n PVAn = (CF / m) × i/m ◦ CF is the series of equal cash flows per year ◦ i is the rate of interest per annum ◦ m is t...
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