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3time Value of Money
3time Value of Money
3time Value of Money
• Berk, J., & Demerzo, P. ( 2011). Corporate Finance: The core (2nd
Ed.). Pearson Education.
2.
3. FV= Future Value
4. PV=Present Value
5. PVoA=Present Value of Ordinary Annuity
F u t u r e Va l u e o f a L u m p s u m
PV (1 k )
n
FV
An Example
If you invest Sh. 150, 000 today, how much will
you have:
a) In 2 years at 9 percent?
b) In 7 years at 12 percent?
c) In 25 years at 14 percent?
P r e s e n t Va l u e o f a L u m p s u m
PV FV (1 K )
n
Example One
(1 k )
n
1
FV Annuity PMT *
k
An Example
• Your younger sister, Linda, will start college in five years.
She has just informed your parents that she wants to go to
Hampton University, which will cost Sh. 150,000 per year
for four years (cost assumed to come at the end of each
year). Anticipating Linda’s ambitions, your parents started
investing Sh. 50,000 per year five years ago and will
continue to do so for five more years. How much more
will your parents have to invest each year for the next five
years to have the necessary funds for Linda’s education?
Use 10 percent as the appropriate interest rate throughout
this problem (for discounting or compounding).
Present Value of Perpetuity
• A perpetuity is a stream of equal cash flow
that occur at regular intervals and last forever
C
PV perpetuity k
Special Cases: Growing Cash Flows
1. Growing perpetuity
2. Growing Annuity
Growing perpetuity
PV C 1
kg
Growing Annuity
1 1 g n
PV C1 * * 1 ( )
kg 1 k
Applications of Time Value of Money
equipment
3. Retirement planning
END