Present Value and Discounting(1) Discounting: The process of calculating the present value of a future cash flow.It is the opposite of compounding. slide 10
slide 10 Present Value and Discounting(1) Present Value and Discounting(1) Discounting: The process of calculating the present value of a future cash flow. It is the opposite of compounding
Present Value and Discounting (2) $2367.36 $1900 $1000 $1000 $422.41 0 10th year slide 11
slide 11 Present Value and Discounting (2) Present Value and Discounting (2) $2367.36 $1900 $1000 $1000 $422.41 0 10th year
Compounding periods(1) Compounding an investment m times a year FV=C,*1+5 m m Effective annual interest rate EAIT=(1+)”-1 m slide 12
slide 12 Compounding periods(1) Compounding periods(1) Compounding an investment m times a year Effective annual interest rate m m r CFV )1(* 0 += −+= 1)1( m m r EAIT
Compounding periods(2) For an investment over one or more (T) years FV=C,*1+I m*T m Continuous Compounding FV=Co e r*t (e=2.718) slide 13
slide 13 Compounding periods(2) Compounding periods(2) For an investment over one or more (T) years Continuous Compounding FV = C 0 * e r*t ( e = 2.718) Tm m r CFV * 0 += )1(*
Simplifications (1) Perpetuity-Consols(British Bonds) C C C PV= 1+r(1+r)2(1+r)3 PV= C Growing Perpetuity PV: C r-g slide 14
slide 14 Simplifications (1) Simplifications (1) Perpetuity– Consols (British Bonds) Growing Perpetuity r C PV r C r C r C PV = + + + + + + = ...... )1()1(1 2 3 gr C PV − = 1