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FV = PV x (1+r)n
FV of Cash Flow at T0 = $3,000 x (1.10)3 = $3,000 x 1.331 = $3,993.00
FV of Cash Flow at T1 = $5,000 x (1.10)2 = $5,000 x 1.210 = $6,050.00
FV of Cash Flow at T2 = $7,000 x (1.10)1 = $7,000 x 1.100 = $7,700.00
FV of Cash Flow at T3 = $9,000 x (1.10)0 = $9,000 x 1.000 = $9,000.00
Total = $26,743.00
ALTERNATIVE METHOD:
Using the Cash Flow (CF) key of the calculator, enter the
respective cash flows.
CF0=-$3000;CF1=-$5000;CF2=-$7000;
CF3=-$9000;
Next calculate the NPV using I=10%; NPV=$20,092.41;
Finally, using PV=-$20,092.41; n=3; i=10%;PMT=0;
CPT FV=$26,743.00
Example 3 Answer
Using the following equation:
1
1
n
1 r
PV PMT
r
Example 3 Answer—continued
Financial calculator
Mode BGN for annuity due
Mode END for an ordinary annuity
Spreadsheet
Type” =0 or omitted for an ordinary annuity
Type = 1 for an annuity due.
FV PMT
1 r 1
n
Perpetuity
A Perpetuity is an equal periodic cash flow
stream that will never cease.
The PV of a perpetuity is calculated by using
the following equation:
PMT
PV
r
Under which of the three options will Roseanne pay the least interest
and why? Calculate the total amount of the payments and the amount
of interest paid under each alternative.
Procedure:
1) Compute the amount of each equal periodic payment
(PMT).
2) Calculate interest on unpaid balance at the end of each
period, minus it from the PMT, reduce the loan balance
by the remaining amount,
3) Continue the process for each payment period, until we
get a zero loan balance.
Example 9 Answer
Using the TVM keys of a financial calculator, enter:
PV=26,000,000; FV=0; N=30; PMT = -1,625,000;
CPT I = 4.65283%
4.65283% = rate of interest used to determine the 30-
year annuity of $1,625,000 versus the $26,000,000 lump
sum pay out.
Choice: If you can earn an annual after-tax rate of
return higher than 4.65% over the next 30 years,
go with the lump sum.
Otherwise, take the annuity option.
INPUT 12 12 -56,662 0
TVM KEYS N I/Y PV PMT FV
OUTPUT 4,984.51
ALTERNATIVE METHOD:
Using the Cash Flow (CF) key of the calculator, enter
the respective cash flows.
CF0=0;CF1=-$4000;CF2=-$4000;CF3=-$4000;
CF4=-$5000; CF5=-$5000; CF6=-$5000
Next calculate the NPV using I=8%;
NPV=$20,537.30;
Finally, using PV=-$20,537.30; n=10; i=8%; PMT=0;
CPT FV$44,338
AMORTIZATION SCHEDULE
Year
Beg. Bal. Payment Interest Prin. Red. End Bal.
1 50,000.0012,522.824,000.00 8,522.82 41,477.18
2 41,477.1812,522.823,318.17 9,204.65 32,272.53
3 2,272.53 12,522.822,581.80 9,941.02 22,331.51
4 22,331.5112,522.821,786.52 10,736.3011,595.21
5 11,595.2112,522.82927.62 11,595.210