Professional Documents
Culture Documents
FIN 201 Chapter 09
FIN 201 Chapter 09
Chapter 9 - Outline
Annuities
Time-Value-of-Money Formulas
The
basic idea behind the concept of time value of
money is:
$1 received today is worth more than $1 in the future
OR
$1 received in the future is worth less than $1 today
Why?
because interest can be earned on the money
$
$1,464.10
future
value
$1,000 present
10% interest
value
0 1 2 3 4
Number of periods
FV = PV X FVIF
A good example is the lottery. If you win the lottery, you may be
given the option of receiving your proceeds over 20 years or as a
lump sum. Money that you receive in the lump sum now is worth
more to you than money you receive over 20 years due to the time
value of money.
2003 McGraw-Hill Ryerson Limited
B. Present Value Formula. You can calculate the present value of a
lump sum using this formula:
PV = FV X 1/(1 + i)n
Where: FV = Future Value
PV = Present Value
I = interest rate and n = time
Using Appendix C:
FVA = A X FVIFA
Where FVA = Future Value of An Annuity
A = Annuity Payment
FVIFA = Interest factor given an interest rate and time period
PVA = A X PVIVA
Sample problem: You need Tk. 1,000 after four periods. With an
interest rate of 10 percent, how much must be set aside at the
end of each period to accumulate this amount
A = PVA/PVIFA
PVIF = PV/FV
PVIFA = PVA/A
B. Deferred Annuity
A deferred annuity is an annuity paid sometime in
the future. First, calculate the present value of
the annuity using Appendix D. Then, calculate the
present value using Appendix B.