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CHAPTER 10 TIME VALUE OF MONEY -…
CHAPTER 10 TIME VALUE OF MONEY
Basic Concept
Future
Value
Present value of lump sum
Present Value of a Multiple Cash Flow
formula
Using Formula
FVn = PV (1+i)n
Using Future Value Table
FVn = PV (FVIF i%,n)
Present value
Future value of Ordinary Annuities
Future value of Annuities Due
Present Value of Ordinary Annuities
Present value of Annuities Due
formula
Using your Formula
PVn = FV [1 / (1+i)n ]
Using Future Value Table
PVn = FV (PVIF i%,n)
Annuities
Future value of lump sum
Future Value of a Multiple Cash Flow
Future Value of a Multiple Cash Flow
A cash flow stream is a finite set of payments that an investor will receive or invest over time.
The future value of a cash flow stream is equal to the sum of the future values of the individual cash flows.
The FV of a cash flow stream can also be found by taking the PV of that same stream and finding the FV of that lump sum using the appropriate rate of return for the appropriate number of periods.
Annuities
An annuity is a cash flow stream in which the cash flows are all equal and occur at regular intervals.
Note that annuities can be a fixed amount, an amount that grows at a constant rate over time, or an amount that grows at various rates of growth over time.
Ordinary annuities – cash flow occur at the end of the period
Annuity Due - cash flow occur at the beginning of the period
Present Value of a Multiple Cash Flow
The PV of the cash flow stream is equal to the sum of the present value of each of the individual cash flows in the stream.
The PV of a cash flow stream can also be found by taking the FV of the cash flow stream and discounting the lump sum at the appropriate discount rate for the appropriate number of periods.
Interpolation
formula
INTERPOLATION
=(factor value (before) – factor value (after))/ Interest (before) + (factor value (before) – calculated factor value) x difference between interest after and before