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FUTURE VALUE OF AN INCOME FLOW

Consider a stream of income transferred
continuously in an account in which it earns
interest over a specified amount of time. The
future value of the income stream is the total
amount (money transferred + interest) that is
accumulated during the specific time period.

Suppose that money is transferred
continuously into an account over a time
period 0 ≤t ≤T at a rate f(t) and the account
earns interest at the annual rate r
compounded continuously. Then the FV of the
income stream over the term T is :

T

T

FV =∫ f ( t ) e e
rT

−rt

0

dt=e

rT

∫ f ( t ) e−rt dt
0

Example:
Money is transferred continuously into an
account at the constant rate of $1200 per

r = 0.08 2 )| =−15000+ 15000 e 0. T = 2 T FV =e rT T ∫ f (t) e −rt 0 dt=e ( 0. .08. The account earns interest at an annual rate of 8% compounded continuously.16 ( 1200 ) ∫ e −0.16 dt=1200 e ( e−0.08 t 0 0. How much will be in the account at the end of 2 years? Solution: Here f(t) = 1200.year.08) ( 2 ) 2 ∫ 1200 e −0.08 t −0.16 0 PRESENT VALUE OF AN INCOME STREAM The present value of an income stream generated at a continuous rate f(t) over a specified term T years is the amount of money A that must be deposited now at the prevailing annual interest rate to generate the same income as the income stream over the same time period T years.08 t 0 dt=e 0.

If the prevailing annual interest rate reeemains fixed at 5% compounded continuously over the next 5 years. The first costs $1000 and is expected to generate a continuous income stream at the rate of f 1 ( t )=3000 e 0. The second costs $4000 and is estimated to generate income at the constant rate of f 2 ( t )=4000 dollars per year . The present value PV of an income stream that is deposited continuously at the rate f(t) into an account that earns interest at an annual interest rate r compounded continuously for a term T years is T PV =∫ f ( t ) e−rt dt 0 Ex: Jane is trying to choose between two investments.Present Value of an Income Flow. which investment is better over this time period? .03t dollars per year .

02 0 NPV = PV – Cost = 14274.03 t −0.05 t 0 e 5 dt =∫ 3000 e −0.05 t e dt−4000=4000 −0.39 Second investment: Net value of investment = present value cost PV .cost = 5 ∫ 4000 e −0.39-1000=13275.05 5 )| −4000=−80000 (e −0.02t 0 dt=3000 ∫ e −0.94 Better investment is the second one Since its NPV is higher = .05 ( 5) −e0 ) −4000 0 $13695.1−e 0 ) −0.05 t 0 ( −0.T PV =∫ f ( t ) e−rt dt 0 5 5 ¿∫ 3000 e 0.02t 5 )| e dt=3000 =−150000 ( e−0.02 t 0 ( −0.

Lecture7 Integration by Parts This is a technique based on the product rule of differentiation. We know that if u and v are differentiable functions of x. then d dv du ( uv )=u + v dx dx dx Integrating both sides with respect to x we get d dv du ∫ dx ( uv ) dx=∫ u dx dx+∫ v dx dx And uv=∫ u dv +∫ vdu So ∫ u dv=uv −∫ vdu Which is the formula for integration by parts. .

So let u=x∧dv =e 4x du=1.Steps to follow:  Choose functions u and dv so that u is easy to differentiate and dv is easy to integrate. 4x dx 4x Both x∧e are easy to differentiate but x becomes simpler after differentiation.  Substitute in the formula and integrate.  Add C at the end of computation. Find ∫ x e 1. dx∧v=¿ SO Noneed 1 4x ( ∫ e dx = 4 e ¿add C here ! ) 4x SO ∫ u dv=uv −∫ vdu 1 1 4x 4x 4x Implies ∫ x e dx=x 4 e −∫ 4 e 1 dx 1 4x (e ) xe 4 ¿ − +C 4 4 4x 4x xe 1 ¿ − e 4 x+ C 4 16 .  Find v and du.

Here lnx has a simpler derivative so we choose u = lnx and dv = x^2 dx Let u = lnx. Both x and √ x+5 are easy to integrate but the function x has an easier derivative.Find ∫ x √ x +5 dx 2.1 . Then dv=x dx 2 1 x3 du= dx∧v= x 3 . So let u=x ∧dv=√ x+ 5 dx 3 ( x+5 ) 2 du=1. 3 ( x +5 ) −∫ 3 ( x +5 ) . dx= 3 x ( x+5 ) − 5 +C= 3 x ( x+5 ) − 15 ( x+5 ) 2 +C 2 x 2 lnx dx ∫ Find 3. dx∧v=∫ √ x +5 dx= 3 2 ∫ u dv=uv −∫ vdu 5 2 ( x +5 ) 2 3 3 3 3 5 2 2 2 3 2 4 2 2 2 2 ∫ x √ x +5 dx=x .

∫ udv=uv −∫ vdu 3 3 3 3 ∫ x 2 lnx dx=lnx . 1x dx= x3 . x3 −∫ x3 .lnx− 13 ∫ x 2 dx = x3 lnx− 13 x3 +C 3 ( ) .