ABH Suppow. year & dlivideat into m equal port or peonacks 5 interat vole #3 1, and suppor thal a cash bag ment of amount A wi ke received at end of Kth period. Then ditcomt factor 1% de 2 x, : The present value of a Pye of A to be vecerved K period in the futux is Tk, led) MK. Presemt and future Values of cash flow streams :— The Icleal Bonk! feo) from book. Chapte-2 , page -19. The constant idleal_banb:~ » ” Future Valwe:- Lel us ckeide on a fixed time cycle for com pouncling (for example carts, o quarterty. ete) and Jef a fertod be the Jength of this cyde - Le assume that cax Hows occur at the end of each period Gimrough forme (lows might be zero). We Poll tape each cash How amd deposit if in a constant rdeol bank as +t arrives. é Of the follow is negative , we cover 44 by toping out a doan. Under the forms of a constant sdeol ban, the final balance Im our accounp can be founded by combining ig the results of the indivicdol flows» Consider the eott pov perro is. cash flow sheam ( % 1%) %y- 1 %m)» OMA Iwtoresb ~ Scanned with CamScanner DOR REP RTET ERP PIII 2-9-4-9 aWWOUOLLSESULUEEGUUDUUUUYD EYEE GEedZ Initial cov flow %_ wit Bove grown to oo ( 147) of the end of 1m pemiods. Cash flow %, will Rowe grow do ay (rar 7 of thep ere tine number of perro is nel Cosh Flow % wil) Rawe. grow to dar) at the end. Final cash flow wil) not coblect ang. mteresf , go UU remain Xn- Therefore , total value at the end of n periede itt: {Fedore Volue = FV = Oe rary s yay ba dery be | Future Value of a steam Given a cash flow stream (1 ,%,---\%n) and Intec! vole y each berrod, the futur value of the stream 4%: n y-| FY = % (ey) + mlite) +--- +n] pti)” ay dary 5.47 "ns lay} i ee Ea Example: Consider the cash {dow stream (-21 1), wfion the ——— periods ave years and the interest vate & 10 7+ Then 2, FV = a0 (rv 4 ny hor] + ty 47) +X, weve %o =-2, ast Mel WEL Ye ol, A ters Mola rl evs oli Petey Cm) +] = 0648 — Scanned with CamScannerPresent Value:— Consigr the stream (os MM)» Tan present value of %- 1h %o, Presnt value of % = a iP fo Me In m ee by Present value of 4, 2 We Gry" es No M&M Gee: om oe = des Similory bresont value of Ay = joey" oH a am 7 cae (ey Therefor. preset vale of the stram is PV = tot + 4... Me. ty itv J* dw J Present Value _of Stam Let (or Am) bea cash How ——— stream and interest vale ber peried ss -v- Then praent value of gen cash flow stream 45+ Scanned with CamScanner 5 ;er ei + SU cy ve gp OT Py ° iy - Garp" (ay? | Example:= Consider the cash {low stream OSHS SMe (9, VAN) ushem the periods are yeon and mierut rote & 107" Then present value of the given sheam &: PY. = -29 4b a a = Ol dey + jp Gp v= 0 jae = el = - cles SE AL PTF Gay? Ga y3 = O4SP x % % On, = PY = Hop BM 4 BH 4. ltr hey Gay)” 7 * % %, = aly es - = (itv) [ ae ere + drs" | dey" zat. [ toler] + a, (ar So aot %n | das t The pesont volue of a cash flow sheam can be regarded or the present payment amount thot i equivalent +o éntive stream . Thus we can thm of the entre stream oy bema replaced by % single flow a4 the invhol hme . ag Coo, Me = 179) ——2 (PV., 09% --0) Scanned with CamScanner TWUSUUUUOUO GU DUD UYU UY SYGEDOEGZFutur value iy the amount of futun bowment thot i equivalent to the emtine steam, We ean think of the adram a being transformed rte thot aingde cask How ot pertod n, pe. (hos yf ny 9 (010, +) PY) => the present value of tht singte equivalent (How 1% obtain by. dhesnting st ba (4) Tht ¢. Py ee py ey. (4r)” Example: Consider cart flow stream Gants) ufen the periods are yoo and Poteet vate & Jovy.» LWe bnew thot PV= O-49%, FY = 0-645. Ore eon cReck. Py = FEV (1479 0643 Get? O-4bF , M Adgo , we may. trons dorm (2,411) —> @-48#, 0,00) a Eat) —s (0.00, 2-648) Frequent and Lontinuo Covnpoimilig Lorsider a cashflow steam Glos %ay- s%n) and % if nominas annual interest vole. Divide uffy one gear into m equally, skaced feeriods. Here total number of pertads jg n, Scanned with CamScanneray ay Ry aS Ss Ss = ) = —~s = S - id ce WWWOVLGGES GOWEDGY & We are compounding of each periods. Then PY = % * ez) “hey at “feey” “ Xe a Tat Ard FN = (+2 }: py m Ss = Urcbr the continuous compourding : at PV = tm 4 et Ae foto 45] ar by aren n => 2 k= ew n —rhy = 2 ™®e Keo of periods are. not equal) pated supbore cash {low occur ak Hmet doy ti, 7 tm whore Lys Kons 40% some K- Suppo cash flow siram is Ke o/m fretted » 2(t) Clad eM}. Thon urate the continuo comboundins. preset value ts 1 Scanned with CamScannerPGA Wey = Hl) KL) nto) PV = 2th) 4+ a a 4 € - > XU) ~ verte hee Vv = 5 alt.) evte Reo __Presond Value and Ideal Bonk: ~ We fenew that an ideal bon con be ured fo cParge the Joattern of @ cash flow stream. For exomnple:- A lo7 bank ean cParge the shear (, 0) toto the steam (0,0, 121) by ee @ okposite of $1.now Qa baying, baneipal and rnfeneat of far ima yer: The bank can ako worn, In a thy PEIGRE Yaron ond te transform (0, 0, rt) to (v4 by tssuma Qa tom fev d $1 now, Equivalent Sixams: 9f an ideal bank can teamform the ree poe heels (tte mye) %n/) Into the stream [Y%)%)--Vm J) 14 can ako tranyform im the reverse cimedion» Two streams that can be framsformec! into each othey are scud do be equivalent streams. —_ Scanned with CamScanner Sk ek te he tm lle ele lel lel lak la a i ReSS Main theorem on Prem! voli The cath flow steams X= (Meeps n) and Ya (YorYy 7) OF equivalent for a contort jdeol bank uxith fered vole y if ond ont of the presmt values of the two streams, evalualed at the bamb's interest vale,» are equal. froof:- LA a and U, be the present vatus of the steams XK and y aap, Then we can transform X = (0% 3-7 %y) ———> (Vin v0, 2-0) rd Y= (Yor Yoon) —— (y127)- 9) 9 is clear thot ttrems (Uy,01--10) andl Ly (Uy 1-79) or equivalent uf and orn if We By @Since xX % equivalent do sham (Ux1%--"1 °) ond yw equialent go strom (Uy 90) ---79)- Thig mp givam, X and y are equivalnt jf ond only vf Ux = Vy. “Inornal wate of Keturn:— (TAR) :~ WOOUGULGWOGGGUCYUG Edd seeds r y “WObUGOUY Scanned with CamScanner