FINC19011 – BUSINESS FINANCE-Wk02-2

Heplanstoinvestthe

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Unformatted text preview: qual cash flows per year ◦ i is the rate of interest per annum ◦ m is the number of compounding per year ◦ n is the number of years Mike White is planning to save up for a trip to Europe in 3 years. He will need $10000 when he is ready to make the trip. He plans to invest the same amount at the end of each of the next 3 years in an account paying 6 per cent. What is the amount he will have to save every year to reach his goal of $10000 in 3 years? Solution: On Next Slide m=1 Annuity Due Annuities due • Annuity is called an annuity due when there is an annuity with payment being incurred at beginning of each period rather than at end • Rent or lease payments typically made at beginning of each period rather than at end Ordinary annuity vs annuity due Annuity Due Annuities due • Annuity transformation method shows relationship between ordinary annuity and annuity due • Each period’s cash flow thus earns extra period of interest compared to ordinary annuity – present or future value of annuity due is always higher than that of ordinary annuity • Annuity due = Ordinary annuity value (1+i) Annuity Present Value of Annuity Due PVADue = PVAOrd CF 1 ×( 1 + i ) = × 1 − ×( 1 + i ) n i (1+i ) ◦ CF is the series of equal cash flows per year ◦ i is the rate of interest per annum ◦ n is the number of years ◦ assuming annual...
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This document was uploaded on 03/27/2014.

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