Stocks versus flows ■ Flows o Variable inputs and outputs are flow measurements .An amount per time period Chapter 15 Slide 6
Chapter 15 Slide 6 Stocks Versus Flows ◼ Flows ⚫ Variable inputs and outputs are flow measurements. ◆An amount per time period
Present Discounted Value(PDV a Determining the value today of a future flow of income o The value of a future payment must be discounted for the time period and interest rate that could be earned Chapter 15 Slide 7
Chapter 15 Slide 7 Present Discounted Value (PDV) ◼ Determining the value today of a future flow of income ⚫ The value of a future payment must be discounted for the time period and interest rate that could be earned
Present Discounted Value(PDV a Future Value(Fv) Future Dollar Value of $invested today=(1+R) PDV=Present dollar value of $1 received in the future (1+R)" (how much would you have to invest today to have a dollar in the future) Chapter 15 Slide 8
Chapter 15 Slide 8 Present Discounted Value (PDV) ◼ Future Value (FV) invest today to have a dollar i n the future) ; (how much would you have to (1 1 i n the future PDV Present dollar value of $1received Future Dollar Value of $1invested today (1 n ) ) n R R + = = = +
Present Discounted Value(PDV Question e What impact does have on the Pdv? Chapter 15 Slide 9
Chapter 15 Slide 9 Present Discounted Value (PDV) ◼ Question ⚫ What impact does R have on the PDV?
PDV of $1 Paid in the Future Interest Rate 1 Year 2 Years 3 Years 4 Years 5 Years 6 Years 0.01$0.990$0.980$0.951$0.905$0.820$0.742 0.02 0.9800.961 0.9060.8200.673 0.552 0.03 0.971 0.943 0.8630.744 0.554 0.412 0.04 0.962 0.925 0.8220.6760.4560.308 0.05 0.9520.907 0.7840.614 0.377 0.231 0.06 0.9430.890 0.7470.558 0.312 0.174
PDV of $1 Paid in the Future 0.01 $0.990 $0.980 $0.951 $0.905 $0.820 $0.742 0.02 0.980 0.961 0.906 0.820 0.673 0.552 0.03 0.971 0.943 0.863 0.744 0.554 0.412 0.04 0.962 0.925 0.822 0.676 0.456 0.308 0.05 0.952 0.907 0.784 0.614 0.377 0.231 0.06 0.943 0.890 0.747 0.558 0.312 0.174 Interest Rate 1 Year 2 Years 3 Years 4 Years 5 Years 6 Years