Value

Annuity - Future Value & Present

series of level/even/equal sized cash flows that
" A for afixed
occur at the end of each time period
time period
" Examplesof Annuities: RD, Saving for a target.
FVA, = A(1+r)n1 + A (1+r)2 + ....+A
= A[(1+r)n - 1]/r
[(1+r) --1]/r= Future Value Interest Factor for
an Annuity, FVIFAn
PVA, =A/(1+r) +A/(1+r)? + .... + A/(1+r)n
=A[1-{1/(1+r)"']/r
[1-{1/(1+r)" H/r= PVIFA,n MBAIE302C 116
 Perpetuity
level/even/equal sized cash flows that
" series of
A an infinite
each period for
occur at the end of
time period
" Present Value of aPerpetuity
" PVA, = XPVIFA,oo
1
PVIFA,co = Lt=1 (1+r)
" PVof a perpetuity of Rs. 10,000 @10% interest?

MBAIE302C 117
 Discounting
Intra Year Compounding and
frequent compounding - other than annual
More
" "Interest on Interest"
Example:
- Rs.1000 single cash flow @12% interest paid Hyly.
General Formula:
m xn

FV, = PV X(1 +)
r= annual rate of interest (compounding)
m=no. of times compounding is done in a year
n= no. of years
MBAIE302C 118
 Investment Criteria
Key steps to determine if a project is worthwhile:
-Estimate costs and benefits
-Assess risks involved
Calculate cost of capital
Compute the criteria of merit (lnvestment Criteria/
Capital Budgeting Techniques)
- Judge whether project is worthwhile or not

MBAIE302C 125
 Investment Criteria
Important Investment Criteria:
1,Discounting Criteria
present value method (NPV)
" Net
Internal rate of return method (IRR)
"
Profitability Index
"Cost Benefit Ratio/

MBAIE302C 126
 Investmnent Criteria
Important Investment Criteria:
1. Discounting Criteria
" Net present value method (NPV)
" Internal rate of return method (IRR)
" Cost Benefit Ratio/ Profitability Index
2. Nondiscounting criteria
" Pay back period method (PBP)
Accounting rate of return method (ARR)

MBAIE302C 126
 Investment Criteria
Important Investment Criteria:
1. Discounting Criteria
" Net present value method (NPV)
" internalrate of return method (IRR)
" Cost Benefit Ratio/ Profitability Index
2. Non discounting criteria
"Pay back period method (PBP)
" Accounting rate of return method (ARR)

MBAIE302C 126
 Present Value Method (NPV)
Net
the sum total of present values of all cash
NPVis
over the life of
flows that are expected to Occur
the project.
C -Initial Investment
NPV =Lt=1(1+r)
C;=Cash flow at the end of year t'
DecisionRule:
If the NPV of a project is more than zero, the project
should be accepted and if NPV is less than zero it should
be rejected.

MBAIE302C 127
 242 (2L) Syn ssl
(3L)
Find NpV.