Finance_4100_Chapter_3.pptx

# 28 present value of an annuity to compare the

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Present Value of an Annuity To compare the relative value of annuities, you need to know the present value of each. Need to know what \$500 received at the end of the next 5 years is worth given discount rate of 6%. Sum up the present values. 29
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Present Value of an Annuity PV of an annuity = Annuity Payment or (PMT) x Present-Value Interest Factor of Annuity (from table) 31
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Amortized Loans Loans paid off in equal installments You borrow \$16,000 at 8% interest to buy a car and repay it in 4 equal payments at the end of each of the next 4 years. What are the annual payments? PV = Annual payment x Present-Value Interest Factor of an annuity 33
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Perpetuities A perpetuity is an annuity that continues to pay forever. Present value of a perpetuity = annual dollar amount provided by the perpetuity divided by the annual interest (or discount) rate. 35
Summary The cornerstone of time value of money is compound interest. Using future-value interest factors from tables, you can determine how much investments will grow over time. The interest rate or the number of years that your money is compounded for increase future values. 36

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Summary Use the present-value interest factor to find present value of future value. An annuity is a equal dollar periodic payment of investment earnings or paying off installment loans. 37
End of Chapter 3 Slides 38
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