CH 5 Time Value of Money
CH 5 Time Value of Money
Time Value of
Money
LG3 Find the future value and the present value of both an
ordinary annuity and an annuity due, and find the
present value of a perpetuity.
LG4 Calculate both the future value and the present value
of a mixed stream of cash flows.
Electronic spreadsheets:
Like financial calculators, electronic spreadsheets have
built-in routines that simplify time value calculations.
The value for each variable is entered in a cell in the
spreadsheet, and the calculation is programmed using an
equation that links the individual cells.
Changing any of the input variables automatically changes
the solution as a result of the equation linking the cells.
PV (1 + 0.06) = $300
Fran Abrams wishes to determine how much money she will have at
the end of 5 years if he chooses annuity A, the ordinary annuity and it
earns 7% annually. Annuity A is depicted graphically below:
PV = CF r
Recalculate the example for the Fred Moreno example assuming (1)
semiannual compounding and (2) quarterly compounding.
The following equation calculates the annual cash payment (CF) that
wed have to save to achieve a future value (FVn):
Suppose you want to buy a house 5 years from now, and you estimate
that an initial down payment of $30,000 will be required at that time.
To accumulate the $30,000, you will wish to make equal annual end-
of-year deposits into an account paying annual interest of 6 percent.