FINC19011 – BUSINESS FINANCE-Wk02-2

Recalculate the pv of this investment pvaord pvadue

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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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This document was uploaded on 03/27/2014.

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