Class 7 Jan 25th Completed

# Old example present value of an annuity m recall the

• Notes
• 16

This preview shows pages 9–13. Sign up to view the full content.

Old Example: Present Value of an Annuity M Recall the example from before: Interest rate is 10% per year. M Timeline: 0 1 2 3 4 Periods -----|----------|----------|----------|----------|--------------- PV = ? 1,000 1,000 1,000 1,000 Cash Flows 87 . 169 , 3 \$ 1 . 0 ) 1 . 1 ( 1 000 , 1 \$ ) 1 ( 1 0 4 0 0 = ⎟ ⎟ ⎠ ⎞ ⎜ ⎜ ⎝ ⎛ = ⎟ ⎟ ⎠ ⎞ ⎜ ⎜ ⎝ ⎛ + = PV PV r r A PV n 9

This preview has intentionally blurred sections. Sign up to view the full version.

10 Car Buying Example M You start a new job and think you have enough money to pay \$500 per month for a new car. Suppose the car dealerships right now offer to lend money at 12% per year compounded monthly for 48 months with a zero downpayment. How much can you spend on a car today? Assume the first payment is due exactly one month after you buy the car. Timeline: 0 1 2 3 4 ……… . 46 47 48 ----|------|------|------|------|-------------------------|------|------|------ 500 500 500 500 ………… .. 500 500 500 ( ) 98 . 986 , 18 \$ 01 . 0 01 . 1 1 500 01 . 1 500 ........ 01 . 1 500 01 . 1 500 01 . 1 500 48 48 3 2 0 = ⎟ ⎟ ⎠ ⎞ ⎜ ⎜ ⎝ ⎛ = + + + + = PV
iClicker Example: PV of an Annuity Due (1) M Recall the example from before, but assume your grandparents plan to give your sister \$1,000 at the beginning of each year in college (starting now) for four years. What is the present value of this annuity? As before, the interest rate is 10% per year. An annuity where payments are made at the beginning of each period is called an annuity due. Draw a timeline! M a) \$3,169.87 b) \$2,486.85 c) \$2,881.70 d) \$3,486.85 e) None of the above. 11

This preview has intentionally blurred sections. Sign up to view the full version.

iClicker Example: PV of an Annuity Due (2) M Recall the example from before, but assume your grandparents give your sister \$1,000 at the beginning of each year in college (starting now) for four years. What is the present value of this annuity? As before, the interest rate is 10% per year.
This is the end of the preview. Sign up to access the rest of the document.
• Spring '10
• E.Fowler

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern