Quick Quiz:Part 1 Suppose you are looking at the following possible cash flows:Year 1 CF =$100;Years 2 and 3 CFs $200;Years 4 and 5 CFs $300 The required discount rate is 7% What is the value of the cash flows at year 5? What is the value of the cash flows today? What is the value of the cash flows at year 3? 10
10 Quick Quiz: Part 1 n Suppose you are looking at the following possible cash flows: Year 1 CF = $100; Years 2 and 3 CFs = $200; Years 4 and 5 CFs = $300. The required discount rate is 7% n What is the value of the cash flows at year 5? n What is the value of the cash flows today? n What is the value of the cash flows at year 3?
Annuities and Perpetuities Defined Annuity-finite series of equal payments that occur at regular intervals If the first payment occurs at the end of the period,it is called an ordinary annuity If the first payment occurs at the beginning of the period,it is called an annuity due Perpetuity infinite series of equal payments 11
11 Annuities and Perpetuities Defined n Annuity – finite series of equal payments that occur at regular intervals q If the first payment occurs at the end of the period, it is called an ordinary annuity q If the first payment occurs at the beginning of the period, it is called an annuity due n Perpetuity – infinite series of equal payments
Annuities and Perpetuities-Basic Formulas Perpetuity:PV=C/r ■Annuities: 1- 1 PV C (1+r) FV .c 12
12 Annuities and Perpetuities – Basic Formulas n Perpetuity: PV = C / r n Annuities: r r FV C r r PV C t t (1 ) 1 (1 ) 1 1
Annuities and the Calculator You can use the PMT key on the calculator for the equal payment The sign convention still holds Ordinary annuity versus annuity due You can switch your calculator between the two types by using the 2nd BGN 2nd Set on the TI BA-II Plus o If you see“BGN"or“Begin"in the display of your calculator,you have it set for an annuity due Most problems are ordinary annuities 13
13 Annuities and the Calculator n You can use the PMT key on the calculator for the equal payment n The sign convention still holds n Ordinary annuity versus annuity due q You can switch your calculator between the two types by using the 2nd BGN 2nd Set on the TI BA-II Plus q If you see “BGN” or “Begin” in the display of your calculator, you have it set for an annuity due q Most problems are ordinary annuities
Annuity-Sweepstakes Example Suppose you win the Publishers Clearinghouse $10 million sweepstakes. The money is paid in equal annual installments of $333,333.33 over 30 years. If the appropriate discount rate is 5%,how much is the sweepstakes actually worth today? .PV=$333,333.33[1-1/1.0530]/.05= $5,124,150.29 14
14 Annuity – Sweepstakes Example n Suppose you win the Publishers Clearinghouse $10 million sweepstakes. The money is paid in equal annual installments of $333,333.33 over 30 years. If the appropriate discount rate is 5%, how much is the sweepstakes actually worth today? § PV = $333,333.33[1 – 1/1.0530] / .05 = $5,124,150.29