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Chap 9 On
Chap 9 On
Chapter 9 - Outline
Annuities
Time-Value-of-Money Formulas
Compounding
Compound Interest Tables
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
•If you expect to receive a sum of money at some future time, what
is the value of that sum of money today?
•In other words, what would you pay for the opportunity of
receiving that money today?
•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
payments.
An annuity is a series of equal, consecutive
must
In calculating the future value of an annuity, you
consider the value of compounding for each
time period in which the annuity is deposited.
calculator
The best methods are to use either a financial
or the interest factor tables at the end of
your textbook.
Using Appendix C:
FVA = A X FVIFA
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
© 2003 McGraw-Hill Ryerson Limited
C. Annuity equaling a present value
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.