Present Value Formulas

Present value of the cash flow stream assuming constant interest rate is C1 C2 C3 CT + + ... + + 2 3 1 + r (1 + r ) (1 + r ) (1 + r)T of the cash flow stream assuming time-dependent interest rate is P V0 = C0 + P V0 = C0 + Future value of the cash flow stream assuming constant interest rate is F VT = C0 (1 + r)T + C1 (1 + r)T −1 + C2 (1 + r)T −2 + ... + CT of the cash flow stream assuming time-dependent interest rate is F VT = C0 (1 +0 rT )T + C1 (1 +1 rT −1 )T −1 + C2 (1 +2 rT −2 )T −2 + ... + CT Perpetuity is an asset that pays a fixed sum each year (time period) forever X C1 C1 C1 C1 C1 + P V0 = + + ... = = 2 3 i 1 + r (1 + r ) (1 + r ) (1 + r ) r i=1 Perpetuity with growing payments is an asset that pays an increasing sum (at constant rate g ) each year (time period) forever X C1 (1 + g )i−1 C1 C1 (1 + g ) C1 (1 + g )2 C1 + + + ... = = P V0 = 2 3 i 1+r (1 + r) (1 + r ) (1 + r ) r−g i=1 Annuity is an asset that pays a fixed sum each year (time period) for a specified number of years (time periods) (from year 1 to year T ) P V0 P V0 X C1 C1 C1 C1 C1 = + + + .. + = 1 + r (1 + r)2 (1 + r)3 (1 + r )T (1 + r)i i=1 ¸ ∙ ∞ ∞ X X C1 C1 C1 C1 1 C1 1 = − = − = 1− (1 + r)i j =T +1 (1 + r)j r (1 + r)T r r (1 + r )T i=1 1
T ∞ ∞

C1 C2 C3 CT + + + ... + 2 3 1 + r1 (1 + r2 ) (1 + r3 ) (1 + rT )T

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