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Present Value

Present value of a lump sum

1

PV = FV * PVIFk ,T FV * T

(1 + k )

**Example 1: Find the present value of a $100 cash flow that is to be received 5 years from now if
**

the interest rate equals 10%.

Present Value Future Value PVIF(10%,5)

$62.09 $100 0.620921

PV = 100 * PVIF10%,5 = 62.09

Calculator Inputs

n=5 i = 10% PV = ? PMT = 0 FV = 100

** Present value of an annuity
**

Note: An annuity is a stream of equal cash flows that occur at equal intervals such as monthly or

annually.

T

1

PV = PMT * PVIFAk ,T PMT *

t

t=1 (1 + k )

1

1 T

1 k 1 1

PMT * PMT * T

k

k k 1 k

Example 2: Find the present value of a $100 annuity that is to be received annually over the next 5

years if the interest rate equals 10%.

Present Value Annuity PVIFA(10%,5)

$379.08 $100 3.790787

PV = 100 PVIFA10%,5 = 379.08

Calculator Inputs

n=5 i = 10% PV = ? PMT = 100 FV = 0

**Example 3: Find the present value of a $100 annuity that is to be received quarterly over the next
**

5 years if the interest rate equals 10%.

Present Value Annuity PVIFA(2.5%,20)

1,558.92 $100 15.589162

PV = 100 PVIFA2.5%,20 = 1,558.92

Calculator Inputs

n = 20 i = 2.5% PV = ? PMT = 100 FV = 0

Note: The discount rate must match the annuity period (i.e., for a quarterly annuity use a quarterly

rate, knom/4.

Note: For an annuity due (i.e., for beginning of the year payments), multiply the present value by

(1+interest rate per period). The present values equal $416.99 and $1,597.89 for examples 2 and

.3 respectively.

5% PV = ? PMT = 0 FV = 100 Continuous k T PV T = FV * e nom Example 6: Find the present value of a $100 cash flow that is to be received 5 years from now if the interest rate equals 10% compounded continuously using the effective annual rate to take the compounding effect into consideration.381289 2.T) k(nom)/4 T*m Compounding $61.T *m = T *m k nom 1 m Example 5: Find the present value of a $100 cash flow that is to be received 5 years from now if the interest rate equals 10% compounded quarterly using the rate per period to take the compounding effect into consideration.517092 5 Continuous % Calculator Inputs n=5 i = 10. Present Value Future Value PVIF(k.Compounding Effects: Annual. Present Value Future Value PVIF(k. Quarterly.610271 10.03 $100 0. Monthly. where m equals the number of periods/year such as 4 for quarterly compounding or k (eff ) e k ( nom ) 1 for continuous compounding.Present Value Lump Sum .T) k(eff) T Compounding $61.381289% PV = ? PMT = 0 FV = 100 Note: To calculate the effective rate use k (eff ) k ( nom) m for discrete compounding. Present Value Future Value PVIF(k. Weekly.381289% PV = ? PMT = 0 FV = 100 FV PV T = FV * PVIF k nom / m .65 $100 0. Semi-annual.606531 10. T = FV * (1 + k eff ) T Example 4: Find the present value of a $100 cash flow that is to be received 5 years from now if the interest rate equals 10% compounded quarterly using the effective annual rate to take the compounding effect into consideration.5% 5*4 Quarterly Calculator Inputs n = 20 i = 2. .03 $100 0. Daily 1 PV T = FV * PVIF k eff .381289 5 Quarterly % Calculator Inputs n=5 i = 10.T) k(eff) T Compounding $60.

5 = 161.t t=1 1 k T 1 PMT * k Example 8: Find the future value at time 5 of a $100 annuity that is to be received annually over the next 5 years if the interest rate equals 10%.05 $100 1.47 $100 25.5% PV = 0 PMT = 100 FV = ? Note: The discount rate must match the annuity period (i.5%.T PMT * (1 + k ) T .544658 FV = 100 FVIFA2..56 and $2.47 Calculator Inputs n = 20 i = 2. .05 Calculator Inputs n=5 i = 10% PV = 100 PMT = 0 FV = ? Future value of an annuity T FV = PMT * FVIFAk .5) $161.51 $100 6. knom/4. Future Value Future value of a lump sum FV = PV * FVIFk . multiply the future value by (1+interest rate per period).T PV * (1 + k ) T Example 7: Find the future value in 5 years of a $100 cash flow if the interest rate equals 10%.33 for examples 8 and 9 respectively. Future Value Present Value FVIF(10%.20 = 2.20) $2.5) $610.554.51 Calculator Inputs n=5 i = 10% PV = 0 PMT = 100 FV = ? Example 9: Find the future value at time 5 of a $100 annuity that is to be received quarterly over the next 5 years if the interest rate equals 10%.e.5 = 610.e. Note: For an annuity due (i.618.105100 FV = 100 FVIFA10%. Future Value Annuity FVIFA(2. for a quarterly annuity use a quarterly rate. for beginning of the year payments). Future Value Annuity FVIFA(10%. The FVs equal $671.610510 FV = 100 FVIF10%..5%.554.

T = PV * (1 + k eff ) Example 10.648721 10. Find the future value in 5 years of a $100 cash flow if the interest rate equals 10% compounded continuously using the effective annual rate to take the compounding effect into consideration. T * m = PV * 1 + m Example 11. Monthly. Future Value Present Value FVIF(k.5% PV = 100 PMT = 0 FV = ? Continuous k T FV T = PV * e nom Example 12.517092 5 Continuous % Calculator Inputs n=5 i = 10.Future Value Lump Sum . Daily T FV T = PV * FVIF k eff . Future Value Present Value FVIF(k.86 $100 1. Find the future value in 5 years of a $100 cash flow if the interest rate equals 10% compounded quarterly using the rate per period to take the compounding effect into consideration.T) k(eff) T Compounding $164. Weekly.5% 5*4 Quarterly Calculator Inputs n = 20 i = 2.381289% PV = 100 PMT = 0 FV = ? T* m k nom FV T = PV * FVIF k nom / m .381289% PV = 100 PMT = 0 FV = ? .86 $100 1.381289 5 Quarterly % Calculator Inputs n=5 i = 10.638616 2. Quarterly.87 $100 1.Compounding Effects: Annual. Find the future value in 5 years of a $100 cash flow if the interest rate equals 10% compounded quarterly using the effective annual rate to take the compounding effect into consideration.T) k(nom)/4 T*m Compounding $163. Semi-annual. Future Value Present Value FVIF(k.638616 10.T) k(eff) T Compounding $163.

554.47 Total interest – Regular interest $100 annuity due for 20 quarters @ 2.33 Total interest – Regular interest N N 1 N ( N 1) N Note: Use n 1 ( n 1) 0 1 2 3 N 1 N for the number 2 2 of periods receiving simple interest for a regular annuity.618.): $100 annuity for 5 years @ 10%/yr FV of annuity $610.33 See example 8 Return of principal 2.00 Pmt * n = 100 * 5 Total interest 110.33 FV – return of principal Regular interest 525.00 Pmt * (knom/m) * n(n+1)/2 = 100 * 10% * 15 Interest on interest 21.5%/qtr FV of annuity $2.00 Pmt * n = 100 * 20 Total interest 618.00 Pmt * (knom/m) * n(n-1)/2 = 100 * 2.51 FV – return of principal Regular interest 100.51 Total interest – Regular interest $100 annuity due for 5 years @ 10%/yr FV of annuity $671.00 Pmt * n = 100 * 5 Total interest 171.47 See example 8 Return of principal 2. N N 1 N Note: Use n 1 n 1 2 3 N for the number of periods receiving simple 2 interest for an annuity due.5%/qtr FV of annuity $2.56 Total interest – Regular interest Example 9 (cont.5% * 210 Interest on interest 93.): $100 annuity for 20 quarters @ 2.00 Pmt * (knom/m) * n(n-1)/2 = 100 * 10% * 10 Interest on interest 10.51 See example 8 Return of principal 500.00 Pmt * (knom/m) * n(n+1)/2 = 100 * 2.56 FV – return of principal Regular interest 150.47 FV – return of principal Regular interest 475.56 See example 8 Return of principal 500.00 Pmt * n = 100 * 20 Total interest 554.000. .5% * 190 Interest on interest 79.000.An analysis of the Future Value Annuity Return Example 8 (cont.

00 Present value Total interest 64.87 FV – return of principal Regular interest 50.): $100 invested for 5 years @ 10%/yr with quarterly compounding FV $163.00 PV * (knom) * n = 100 * 10% * 5 Interest on interest 13.): $100 invested for 5 years @ 10%/yr with quarterly compounding FV $163.86 FV – return of principal Regular interest 50.): $100 invested for 5 years @ 10%/yr with continuous compounding FV $164.86 Total interest – Regular interest Example 11 (cont.00 PV * (knom) * n = 100 * 10% * 5 Interest on interest 14.86 See example 10 Return of principal 100.87 Total interest – Regular interest .An analysis of the Future Value Return of a Lump Sum Example 10 (cont.5% * 20 Interest on interest 13.86 See example 11 Return of principal 100.86 Total interest – Regular interest Example 12 (cont.87 See example 12 Return of principal 100.00 Present value Total interest 63.00 PV * (knom/m) * (m*n) = 100 * 2.86 FV – return of principal Regular interest 50.00 Present value Total interest 63.

03 2 $2.398.637.362.Loan Amortization Schedule Example: $10.180. Balance Interest Principal End.97 $4.97 $10.000.637.20 $1. . Balance 1 $2. 5 year loan at 10%/year Payment equals $2.e.30 4 $2.637 .00 $1.30 $457. Prin.25 $656.14 $2.981.16 $239.97 (i.362.578.00 $1.637. Repayment of Year Payment Beg.560.97 $8.560.637. 5).000.77 $6.398.398.25 3 $2.97 $8.16 $0.03 $1.00 Payment ..16 5 $2.578.801.637.83 $2. Beg Bal – = End Balancet-1 Beg Bal * k Interest Repay.000.637.82 $2. 10000 = PMT * PVIFA10%.97 $6.97 $2.03 $836.95 $4.

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