Future value = c(1+r)^t

Present valu(pv) = c/(1+r)^t

Discount factor =( 1/1+r)^t
whenever they are asking to calculate present value they will give future value
how to find given is present or future value ?
Perpetiuty is schemes like investing money and receiving intrest upto you die .
If invested amount is returned in llimited time its annuity
PERPETUITY
Return in perpetiuity
perpetuity for present value = CASHFLOW(c)/Discount rate®
Discount rate [R] = C/PV
Dicount factor = (CASHFLOW(c)/Discount rate)*1/(1+r)^t
present value of growing pertuity = cash flow/ r-g
delayed perpetuity = cf*1/r*1/(1+r)^t

Annuity
Present value = C(1/r-1/r(1+r)^t)
PV annuity due = PV annuity*(1+r)
Futurevalue = c((1+r)^t-1)/r)

present value of growing Annuity = cash flow * (1/(r-g))*(1-(1+g)^t/(1+r)^t))

NPV
net present value = Present value - Cost

NPV= C0+C1/1+R
ROI=profit/investment= sale-inv/inv
PVAF=1/r-1/r(1+r)^t
if time period is infinity its perpetuity
Annuity is for limited time

t is no of years delayed

C - cash flow at end of the year

(1/r-1/r(1+r)^t) = present value annuity factor

if beginning of each year mentioned in questions we should find DUE

rship and control – double edged swords
•Ownership with shareholders but control with managers
•Advantages – helps the business grow in size and overcomes scali
•Risks à managers interests may not always be aligned with perfe
•Managers may shy away from attractive but risky projects
•Because, managers are more worried about the safety of their job

Agency problems
•Conflicts between managers’ and shareholders’ objectives cause a
•Shareholders – principals ; managers – agents
costs – when do they arise?
•Managers do not attempt to maximize firm value
•Shareholders incur costs to monitor the managers and constrain t
Specific Agency problems
•Reduced effort
•Managers don’t put the necessary effort to find and implement positive NPV
•This is a high-effort, high-pressure activity

Perks
Empire building

Entrenching investment
• Managers don’t put the necessary effort to find and imple
• This is a high-effort, high-pressure activity
 • Upscale office accommodations, meetings at luxury reso
• Perks, Non-pecuniary rewards, private benefits
• Managers prefer to run larger businesses rather than sm
• Growing from small to large → not always a positive-NPV
• Projects designed to require or reward the skills of existin
• Manager Q – specialised skills
• Expansion plan A – specialised skills required ; expansion
• Which plan will manager Q prefer?

Overinvestment

ufficient Overinvestment
disinvestment
• Investing beyond the point where NPV falls to zero.
• Indicators – entrenching investments and empire building
• Occurs when there is plenty of cash but limited investmen
flow problem
managers
d overcomes scaling problems associated with partnerships and proprietorsh
aligned with perfectly with that of the shareholders
ky projects
safety of their jobs, bonuses rather than maximising shareholder value

objectives cause agency problems

ers and constrain their actions

lement positive NPV projects

to find and implement positive NPV projects

gs at luxury resorts, private jets etc
enefits
s rather than small ones
s a positive-NPV undertaking
e skills of existing managers

uired ; expansion plan B – general purpose skills

ls to zero.
empire building
mited investment opportunities → Free cash
s and proprietorships

holder value
Present value = C(1/r-1/r(1+r)^t)
-28753.69505
71428.5714285714

Futurevalue = c((1+r)^t-1/r)

Ben Bates (Current job)

salary 65000
G 3%
TAX RATE 26%
TIME 40 years
After tax rate C*(1-R) 48100
Wilton University
Tuition fees 70000
book fees 3000
insurance 3000
Room and boarding 2000
expenditure 78000

benefits for wilton university

salary 110000
bonus 20000
growth rate 4%
after tax rate 75900
tax rate 31%
after tax bonus 13800

bradely school
tuition 85000
books 4500
insurance and room 5000
94500
benefits
salary 92000
bonus 18000
growth rate 3.5
after tax rate 65320
tax rate 29%
after tax bonus 12780

PV growing annuity salary 1359410

value of wilton college 152498.6
benefits 2439811
bonus +benefits 2453611

Value of package today 2238270

Net benefits 2085771

Value of BSB 94500

benefits 1971027
Value of PKG 1983807
VoP Today 1894754
Net benefits 1800254

Comparing the net benefits of two colleges salary packages Wilton MBA has higher benfits than BSB
Future Value P*(1+r)^t
Present Value C/(1+r)^t
Discount Factor 1/(1+r)^t
Net Present ValuePV-C0

1/(1+r)^t=discount factor
r=discount rate

Perpetuity(PV) C/r
Delayed Perp (C/r)*discount factor
Annuity(PV) (C/r)*(1-discount factor)
Annuity Due Annuity*(1+r)
Annuity(FV) (C/r)*(((1+r)^t) - 1)/r)
Annuity Due(FV) FV Annuity * (1+r)
PV Gro Perp (C1/(r-g))
PV Gro Annuity (C/(r-g))*(1-((1+g)^t)/(1+r)^t))