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• 4.6 Annuities
• 4.7 Future Value of an Ordinary Annuity
• 4.8 Future Value of an Annuity Due
• 4.9 Present Value of an Ordinary Annuity and
of an Annuity Due
• 4.10 Finding Annuity Payments, Periods, and
Interest Rates
• 4.11 Perpetuities
• 4.12 Uneven, or Irregular, Cash Flows
• 4.13 Future Value of an Uneven Cash Flow
Stream
• 4.14 Solving for I with Uneven Cash Flows
• 4.15 Semiannual and Other Compounding
Periods
0 1 2 Year
I%
100
0 1 2 3
I%
0 1 2 3
I%
–50 100 75 50
0 1 2 3
5%
100 FV = ?
FV1 = PV + INT1
= PV + PV (I)
= PV(1 + I)
= $100(1.05)
= $105.00
FV2 = FV1(1 + I)
= PV(1 + I)(1 + I)
= PV(1 + I)2
= $100(1.05)2
= $110.25
FV3 = FV2(1 + I)
=PV(1 + I)2(1 + I)
= PV(1 + I)3
= $100(1.05)3
= $115.76
In general,
FVN = PV(1 + I)N (4-1)
INPUTS 3 5 -100 0
N I/YR PV PMT FV
OUTPUT 115.76
• N = Number of periods
• I/YR = Interest rate per period
• PV = Present value
• PMT = Payment, a series of equal, or constant,
payments in an annuity situation
• FV = Future value
• For PV, PMT, and FV, numbers must be
entered (and are to be returned by the
calculator) as positive or negative to indicate
an inflow or outflow
Copyright © 2017 by Nelson Education Ltd. 4-24
Spreadsheet Solution
• Use the FV function:
0 1 2 3
5%
PV=? $115.76
Finding today’s equivalent value (PVs) of some
cash flow due N periods in the future (that is,
going backward from FVs to PVs or moving to
the left on a time line) is called discounting.
0 1 2 3
10%
PV = ? 100
FVN N
1
PV = = FVN (4-3)
(1 + I)N 1+I
1
3
PV = $100
1.10
= $100(0.7513) = $75.13
INPUTS 3 10 0 100
N I/YR PV PMT FV
OUTPUT -75.13
0 1 2 10
?%
–100 150
FVN = PV(1 + I)N
$150 = $100(1 + I)10
(1.5)(1/10) = (1 + I)
1.0414 = (1 + I)
I = 0.0414 = 4.14%
–500,000 1 million
FV = PV (1 + I)N
Ordinary annuity
0 1 2 3
I%
0 1 2 3
5%
(1 + I)N – 1
FVAN = PMT (4-4)
I
(1 + 0.05)3 –
= 100 1 = 315.25
0.05
(1 + I)N – 1
FVN + PV(1 + I)N + PMT =0 (4-5)
I
INPUTS 3 5 0 -100
N I/YR PV PMT FV
OUTPUT 315.25
1 1
PVAN = PMT − (4-7)
I I (1 + I)N
1 1
= 100 − = $272.32
0.05 0.05(1 + 0.05)3
INPUTS 3 5 -100 0
N I/YR PV PMT FV
OUTPUT 272.32
0 1 2 3
10%
INPUTS 3 5 -100 0
N I/YR PV PMT FV
OUTPUT 285.94
INPUTS 5 6 0 10,000
N I/YR PV PMT FV
OUTPUT -1,673.55
• LARGER!
(M)(N)
INOM
FVN = PV 1 + (4-14)
M
= $100(1.03)8 = $126.68
= (1.01)12 – 1.0
= 0.126825 = 12.6825%
Copyright © 2017 by Nelson Education Ltd. 4-84
The Result of Frequent Compounding
IPER = 10%/365
= 0.0273973% per day.
FV 274 = $100 (1.000273973)274
= $100 (1.077947) = $107.79
0 1 2 274
0.0273973%
–100 FV =?
0 1 2 3
10%
INPUTS 3 10 -1000 0
N I/YR PV PMT FV
OUTPUT 402.11