**Unformatted text preview: **compounding in this formula e.g., Ordinary annuity versus annuity due An investment opportunity requires a payment of $750 for 12 years, starting a
year from today. If your required rate of return is 8 per cent, what is the value
of the investment today? Now, assume this is an annuity due with payments
starting today. Recalculate the PV of this investment. PVAOrd PVADue CF 1
=
× 1 −
= $5, 652.06
n
i (1+i ) 750 1
= PVAOrd × ( 1 + i ) =
× 1 −
×1.08
12 0.08 (1.08) PVADue = 750 × 7.5361 ×1.08 = 5,652.06 ×1.08
PVADue = $6,104.22 Slide
25 li e.g. PV of an ordinary annuity Present value of an ordinary annuity: An investment
opportunity requires a payment of $750 for 12 years,
starting a year from today. If your required rate of return is
8 per cent, what is the value of the investment today? CF 1
PVAn =
× 1 −
n
i
(1 + i) 750 1
=
× 1 −
= 750 × 7.5361
12 0.08 (1.08) = $5, 652.06 li e.g. Ordinary annuity versus annuity due Recall Q from Previous slide : An investment opportunity requires
a payment of $750 for 12 years, starting a year from today. If your required
rate of return is 8 per cent, what is the value of the investment today? Now, assume this is an annuity due with payments starting today.
Recalculate the PV of this investment. PVAOrd CF 1
=
× 1 −
= $5, 652.06
n
i
(1 + i) PVADue = PVAOrd 750 1
×(1 + i ) =
× 1 −
×1.08
12 0.08 (1.08) PVADue = 750 × 7.5361 ×1.08 = 5, 652.06 ×1.08
PVADue = $6,104.22 Perpetuities
A perpetuity is constant stream of cash flows
that goes on for infinite period
• In share markets, preference shares issues
are considered to be perpetui...

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