2-1 FV Annuity Formula The future value of an annuity with n periods and an interest rate of i can be found with the following formula:

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Presentation transcript:

2-1 FV Annuity Formula The future value of an annuity with n periods and an interest rate of i can be found with the following formula:

2-2 Financial calculators solve this equation: There are 5 variables. If 4 are known, the calculator will solve for the 5th. Financial Calculator Formula for Annuities

NI/YRPVPMTFV Financial Calculator Solution Have payments but no lump sum PV, so enter 0 for present value. INPUTS OUTPUT

2-4 Spreadsheet Solution Use the FV function: see spreadsheet. = FV(Rate, Nper, Pmt, Pv) = FV(0.10, 3, -100, 0) =

2-5 What’s the PV of this ordinary annuity? % = PV

2-6 PV Annuity Formula The present value of an annuity with n periods and an interest rate of i can be found with the following formula:

2-7 Have payments but no lump sum FV, so enter 0 for future value NI/YRPVPMTFV INPUTS OUTPUT Financial Calculator Solution

2-8 Spreadsheet Solution Use the PV function: see spreadsheet. = PV(Rate, Nper, Pmt, Fv) = PV(0.10, 3, 100, 0) =

2-9 Find the FV and PV if the annuity were an annuity due % 100

2-10 PV and FV of Annuity Due vs. Ordinary Annuity PV of annuity due: = (PV of ordinary annuity) (1+i) = (248.69) ( ) = FV of annuity due: = (FV of ordinary annuity) (1+i) = (331.00) ( ) = 364.1

NI/YRPVPMTFV Switch from “End” to “Begin”. Then enter variables to find PVA 3 = $ Then enter PV = 0 and press FV to find FV = $ INPUTS OUTPUT

2-12 Excel Function for Annuities Due Change the formula to: =PV(10%,3,-100,0,1) The fourth term, 0, tells the function there are no other cash flows. The fifth term tells the function that it is an annuity due. A similar function gives the future value of an annuity due: =FV(10%,3,-100,0,1)

2-13 What is the PV of this uneven cash flow stream? % = PV

2-14 Financial calculator: HP10BII Clear all: Orange Shift key, then C All key (in orange). Enter number, then hit the CF j key. Repeat for all cash flows, in order. To find NPV: Enter interest rate (I/YR). Then Orange Shift key, then NPV key (in orange).

2-15 Financial calculator: HP10BII (more) To see current cash flow in list, hit RCL CF j CF j To see previous CF, hit RCL CF j – To see subseqent CF, hit RCL CF j + To see CF 0-9, hit RCL CF j 1 (to see CF 1). To see CF 10-14, hit RCL CF j. (period) 1 (to see CF 11).

2-16 Input in “CFLO” register: CF 0 = 0 CF 1 = 100 CF 2 = 300 CF 3 = 300 CF 4 = -50 Enter I = 10%, then press NPV button to get NPV = (Here NPV = PV.)

2-17 Spreadsheet Solution Excel Formula in cell A3: =NPV(10%,B2:E2) ABCDE