FIN 614: Financial Management Larry Schrenk, Instructor.

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Presentation transcript:

FIN 614: Financial Management Larry Schrenk, Instructor

1.What is an Annuity? 2.Regular Annuities 1.Present Value (PV) 2.Future Value (FV)

Cash Flows that are: Finite Constant At Regular Intervals Examples: I promise to pay you $100 per year for 5 years. I promise to pay you $10 per week for 27 weeks.

A 5 year annual, annuity of $50: TECHNICAL NOTE: When we use the term (regular) ‘annuity’ we mean an ‘annuity in arrears’, i.e., an annuity whose first payment begins next (not this) period. An annuity that begins this period is called an ‘annuity due’ and will be considered toward the end of the lecture

Annuities can always be valued as a series of one time cash flows (r = 7%):

Present Value of an Annuity

Future Value of an Annuity

‘Borrowing’ Problems (Loans) How much can I borrow (PV)? How much are my payments (PMT)? What interest rate am I getting (I/Y)? How long will it take (N)? ‘Value Now’ Problems How much is it worth now(PV)? How much are my cash flows(PMT)? What is the interest rate (I/Y)? How long does it go on(N)?

‘Savings’ Problems (Retirement Fund) How much will I have (FV)? How much are my payments (PMT)? What interest rate am I getting (I/Y)? How long will it take (N)?

NOTE: The formula assumes that the first payment begins next period as does the calculator function.

What is the value now of receiving $50 a year for the next 5 years? N = 5; I/Y = 7; PV = $ ; PMT = -50; FV = 0

NOTE: The formula again assumes that the first payment begins next period as does the calculator function.

How much will I have in 5 years, if I save $50 every year and get a return of 7%? N = 5; I/Y = 7; PV = 0; PMT = -50; FV = $287.54

FIN 614: Financial Management Larry Schrenk, Instructor