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HOW TO CALCULATE
PRESENT VALUES
Brealey, Myers, and Allen
Principles of Corporate
Finance
11th Edition
McGraw-Hill/Irwin
2-2
FV $100 (1 r)
Example: FV
What is the future value of $100 if interest is
2-4
Present va lue = PV
PV = discount factor C1
2-5
2-6
PV DF2 C2
PV
1
(1.07 ) 2
114.49 100
2-7
2-8
Capital
If equally risky investments in the capital
market offer a return of 7%, then cost of
capital = r = 7%
2-9
PV
C1
(1r )
$800, 000
(1.07 )
$747,664
investment
2-11
PV of C1 $800,000 at 7%
$800,000
PV
$747,664
1 .07
2-12
2-13
$800,000
NPV = $700,000 +
$27,273
1.1
2-14
.143, or 14.3%
investment
$700,000
2-15
PV0
C1
Ct
(1 r ) 2 .... (1 r )t
C2
(1 r )
NPV0 C0 (1 r )t
Ct
t 1
2-16
2-17
cash flow
Return
present va lue
C
r
PV
2-18
cash flow
PV of cash flow
discount rate
C1
PV0
r
2-19
PV
$1 bil
0.10
$10 billion
2-20
PV
$1 bil
0.10
$7.51 billion
1
1.103
2-21
Year of Payment
1
2..t
Present Value
t+1
Perpetuity (first
payment in year 1)
Perpetuity (first
payment in year t + 1)
Annuity from
year 1 to year t
C C
r r
t
(1 r )
2-22
at the end of each year for 5 years. If interest rates are 7%,
per year, what is the cost of the car?
2-23
1
1
PV of annuity C
t
r r 1 r
2-24
1
Lottery Value 12.167
30
.
06
.
06
1
.
06
Value $167,500,000
2-25
1 r 1
FV of annuity C
2-26
1 .08 5 1
FV 20,000
.08
$117,332
2-27
C1
g = the annual growth
PV0
rg
rate of the cash flow
This formula can be used to value a perpetuity
at any point in time
Ct 1
PVt
rg
2-28
1
PV0
.10 .04
$16.667 billion
2-29
2-30
interest
2-31
2-32