- Present value of a single amount

o Determine the value today of a future amount of money. How much would I have to
deposit today to accumulate $3000 at the end of 5 years?
o Process of finding present value is discounting cash flows.
o Present value single amount formula
FVn $1700 $1700
PV = ------ = -------- = -------- = $918.42
(1+i) n (1+.08)8 1.851

 Using the table you find the interest value at the top, and then multiply by
the time the money is deposited. PV = FVn x PVIF I,n
 Table A-3
o Example
 Pam wishes to find the present value of $1700 to be received eight years
from now, assuming an 8% opportunity cost. So FV = $1700, n = 8, I = 0.08

$1700 $1700
PV = -------- = -------- = $918.42
(1+.08)8 1.851
 She would need to invest $918.42 to get $1700 at 8% interest in 8 years.

Annuities

- Annuities is a stream of equal periodic cash flows, over a specific time period.]
- Two basic types of annuities
o Ordinary annuity where cash flow occurs at the end of each period. You get
payment at the end of the period.
o Annuity due where cash flow occurs at the beginning of each period.
 Annuity due is always better as each of its annual cash flows for each period
can earn one year more interest than each of the ordinary annuity’s cash
flows.
- Future value of an ordinary annuity formula
o FVAn = PMT x (FVIFAI,n)
o Example
 Jane wishes to find the future value (FVA) at the end of five years (n) on an
annual end-year deposit of $1000 (PMT) into an account paying 7% annual
interest (i) during the next 5 years.
 Using Table A-2 – Find 7% on the top, then 5 years as the period.
 = 5.751 = $1000 x 5.751 = future value for the annuity is $5751.
- Present value of an ordinary annuity
o PVAn = PMT x (PVIFAi,n)
o Brandon wants to determine the most it should pay to purchase an ordinary annuity.
The annuity has $700 cash flow at the end of each year for five years. The firm
requires the annuity to provide a minimum return of 8%.
o PVAn = PMT x (PVIFAi,n) = 700 x (3.933) = $2795.10
- Future value of an annuity due
o These cash flows occur at the start of the period, allowing more interest to occur.
 o FVIFA (annuity due) = FVIFAi,n x (1+ i)
 This equation says the future value interest factor for an annuity due can be
found merely by multiplying the future value interest factor for an ordinary
annuity at the same per cent and numbers of period (1+i).
o Example
 Jane has an investment of $1000 annually, with an interest rate of 7% and
will be deposited for 5 years.
 FVIFAi,n x (1+i) = FVIFA7%,5yrs x (1.0.07) = 5.751 x 1.07 = 6.154 = 1000 x 6.154 =
$6154.
 Her earnings will be $6154 using this annuity due where as ordinary annuity
will only get her $5750.74. Therefore annuity due has greater future value.
- Present value of an annuity due
o PVIFA (annuity due) = PVIFAi,n x (1+ i)
 This equation indicates that the present value for an annuity due can be
obtained by multiplying the present value interest factor for an ordinary
annuity using same per cent and numbers of period (1+i).
o Example
 Brandon $700 annual payment and 8% interest annually over 5 years.
 PVIFAi,n x (1+ i) = PVIFAi,n x (1+0.08) = 3.933 x (1.08) = 4.312 = $700 x 4.312 =
$3018.40
 By the end of 5 years, Brandon will have $3018.40 using annuity due, rather
than $2794.90 using ordinary annuity.
- Perpetuity is an annuity with an infinite life – in other words, it never stops providing its
holder with a cash flow at the end of each year (right to get $500 every year forever).
o Present value of a perpetuity
 PVIFAi,8 = 1/i
 200,000 per year with a 10% interest.
 PVIFAi,8 = 1/i = 1/0.10 = 10 = 200,000 x 10 = 2,000,000.
 In other words it would take 200,000 ever year, it requires
$2,000,000 investment today if the university can earn 10% on its
investments.

Mixed Streams
 o A stream of unequal periodic cash flows that reflect no particular pattern.
o To determine future value, we value each cash flow at the specified future date,
then add all the individual future values to find the total future value.
- Future value of a mixed stream
o Example
 If Shrell expects to earn 8% on investments, how much will it accumulate by
the end of year 5 if it immediately invests these cash flows when they are
received?

End of year Cash flow No. of years FVIF8%,n

earning
interest
1 11,500 5-1=4 1.360
2 14,000 5-2=3 1.260
3 12,900 5-3=2 1.166
4 16,000 5-4=1 1.080
5 18,000 5-5=0 1.000
- FVIF is gotten by table A1, at the top you look for 8% and on the left you look for the year, ie.
4,3,2,1,0.
- You then multiple cash flow by FVIF so Future value = Cash flow x FVIF.