FUTURE VALUE OF AN INCOME FLOW

Consider a stream of income transferred

continuously in an account in which it earns
interest over a specified amount of time. The
future value of the income stream is the total
amount (money transferred + interest) that is
accumulated during the specific time period.

Suppose that money is transferred

continuously into an account over a time
period 0 t T at a rate f(t) and the account
earns interest at the annual rate r
compounded continuously. Then the FV of the
income stream over the term T is :

FV = f ( t ) e e
rT

rt

dt=e

rT

f ( t ) ert dt
0

Example:
Money is transferred continuously into an
account at the constant rate of $1200 per

year. The account earns interest at an annual

rate of 8% compounded continuously. How
much will be in the account at the end of 2
years?

Solution:
Here f(t) = 1200, r = 0.08, T = 2
T

FV =e

rT

f (t) e

rt

dt=e

( 0.08) ( 2 )

1200 e

0.08 t

dt=e

0.16

( 1200 ) e

0.08 t

0.16

dt=1200 e

e0.08 t
0.08

)| =15000+ 15000 e

0.16

PRESENT VALUE OF AN INCOME STREAM

The present value of an income stream
generated at a continuous rate f(t) over a
specified term T years is the amount of
money A that must be deposited now at the
prevailing annual interest rate to generate the
same income as the income stream over the
same time period T years.

Present Value of an Income Flow.

The present value PV of an income stream
that is deposited continuously at the rate f(t)
into an account that earns interest at an
annual
interest
rate
r
compounded
continuously for a term T years is
T

PV = f ( t ) ert dt
0

Ex: Jane is trying to choose between two

investments. The first costs $1000 and is
expected to generate a continuous income
stream at the rate of
f 1 ( t )=3000 e 0.03t dollars per year .

The second costs $4000 and is estimated to

generate income at the constant rate of
f 2 ( t )=4000 dollars per year .

If the prevailing annual interest rate

reeemains fixed at 5% compounded
continuously over the next 5 years, which
investment is better over this time period?

PV = f ( t ) ert dt
0

3000 e

0.03 t 0.05 t

dt = 3000 e

0.02t

dt=3000 e

0.02 t

0.02t

)|

e
dt=3000
=150000 ( e0.1e 0 )
0.02 0

NPV = PV Cost = 14274.39-1000=13275.39

Second investment:
Net value of investment = present value cost

PV - cost =
5

4000 e

0.05 t

0.05 t

e
dt4000=4000
0.05

)| 4000=80000 (e

0.05 ( 5)

e0 ) 4000

$13695.94
Better investment is the second one
Since its NPV is higher

Lecture7
Integration by Parts

This is a technique based on the product rule

of differentiation.
We know that if u and v are differentiable
functions of x, then

d
dv
du
( uv )=u + v
dx
dx
dx

Integrating both sides with respect to x we

get
d

dv

du

dx ( uv ) dx= u dx dx+ v dx dx

And

uv= u dv + vdu

So u dv=uv vdu
Which is the formula for integration by parts.

Steps to follow:
Choose functions u and dv so that u is
easy to differentiate and dv is easy to
integrate.
Find v and du.
Substitute in the formula and integrate.
Add C at the end of computation.

Find x e

1.

4x

dx

4x

Both xe
are easy to differentiate but x
becomes simpler after differentiation. So
let u=xdv =e

4x

du=1. dxv=

SO

Noneed
1 4x (
e dx = 4 e add C here ! )
4x

SO u dv=uv vdu
1

4x
4x
4x
Implies x e dx=x 4 e 4 e 1 dx

1 4x
(e )
xe
4

+C
4
4
4x

4x

xe
1

e 4 x+ C
4
16

Find x x +5 dx

2.

Both x and x+5 are easy to integrate but the

function x has an easier derivative.
So let

u=x dv= x+ 5 dx
3

( x+5 ) 2
du=1. dxv= x +5 dx=
3
2

u dv=uv vdu

2
( x +5 ) 2
3
3
3
3
5
2
2
2
3
2
4
2
2
2
2
x x +5 dx=x . 3 ( x +5 ) 3 ( x +5 ) .1 . dx= 3 x ( x+5 ) 5 +C= 3 x ( x+5 ) 15 ( x+5 ) 2 +C
2

x 2 lnx dx

Find

3.
Here lnx has a simpler derivative so we
choose u = lnx and dv = x^2 dx
Let u = lnx. Then dv=x dx
2

1
x3
du= dxv=
x
3

 udv=uv vdu
3

x 2 lnx dx=lnx . x3 x3 . 1x dx= x3 .lnx 13 x 2 dx = x3 lnx 13

x3
+C
3

( )