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Chapter 5 Discounted Cash Flow Valuation (Annuity (finite series of equal…
Chapter 5 Discounted Cash Flow Valuation
Annuity
finite series of equal payments that occur at regular intervals
ordinary annuity: first payment occurs at the end of period
annuity due: first payment occurs at the beginning of the period.
Future Value Annuity
even cash flow
ordinary annuity
annuity due
Perpetuity
infinite series of equal payments
Formulae:
Present Value Annuity
even cash flow
Important points!
Interest and time period must match!
positive indicate cash inflows
negative indicate cash outflows
Effective annual rate (EAR)
interest rate expressed as if it were compounded once per year
used to compare two alternatives investments with different compounding
formulae:
Annual percentage rate (APR)
Formulae
Period rate x number of periods
Compute APR from EAR
Loan
Pure discount
principal amount is repaid at some future date.
Amortization
Equal principal balance
each payment cover interest expense & principal, principal paid at equal amount
Fixed payment
each payment cover interest expenses and principal; total payment paid with equal amount.
Interest only loan
pay interest each period and repay the entire principal at some future date
