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Types of problems
Single Sum. One sum ($1) will be
received or paid either in the
Present (Present Value of a Single
Sum or PV)
Future (Future Value of a Single Sum
or FV)
PV
FV
PV-OA
PMT
PMT
PMT
PMT
PMT
FV-OA
PMT
PMT
PMT
PMT
PMT
Types of Problems
Annuity Due (AD)
AD
A series of equal payments (or rents) received or
paid at the beginning of a period, assuming a
constant rate of interest.
PMT
PMT
PMT
PMT
Types of Problems
Annuity Due (AD)
AD
A series of equal payments (or rents) received or paid at the
beginning of a period, assuming a constant rate of interest.
PV-AD
PMT
PMT
PMT
PMT
Deferred Annuities
0
PMT
PMT
PMT
n=3
d=2
This is an ordinary annuity of 3 periods deferred for 2
periods.
We could find either the PV or the FV of the annuity.
Calculation Variables
There will always be at least four
variables in any present or future value
problem. Three of the four will be
known and you will solve for the fourth.
Single sum problems:
Annuity Problems
n = number of payments or rents
i = interest rate
PMT = Periodic payment (rent) received or
paid
And either:
FV = (1+i)n
PV = FV
(1+i)n
FV = (1+i)n
PV = FV
(1+i)n
Present value calculators are generally
no more expensive than those that do
nth powers and nth roots!
Annuity Formulas
FV-OA =
PV-OA =
PMT (1 + i) - 1
i
PMT
1-
1
(1 + i)n
i
Adjustments to ordinary
annuity tables
Rules for annuity dues and
deferred annuities
Page 480
FV-AD
PMT
PMT
PMT
PMT
PMT
Deferred Annuities
0
PMT
PMT
PMT
n=3
d=2
When using the tables, there are some short-cuts for
doing deferred annuities
$100
$100
$100
n=3
d=2
Let i = 12%
Find the present value of the
annuity due:
$100
$100
$100
d=2
n=3
d=2
$100
$100
$100
n=3
3.6048
-1.6901
1.9147
d=2
$100
$100
$100
n=3
2.4018
0.7972
1.9147
Deferred Annuities
0
FV
3
PMT
PMT
PMT
n=3
d=2
If it is a FV problem, this is pretty much the only
way to analyze the facts.
However . . . .
Deferred Annuities
PV
0
PMT
PMT
PMT
n=3
d=2
We could do it the same way if we wanted to
compute the present value, but we could also
analyze it as an annuity due problem.
Deferred
PV
0
PMT
PMT
PMT
n=3
d=3
Then it would be 3 annuity due payments and the
period before the annuity starts would be 3 periods
instead of 2.
Deferred Annuities
PV
0
PMT
PMT
PMT
n=3
d=3
Now see if you can work the problem (with the
tables) if you analyzed the annuity as having the
first payment happen immediately.
Spreadsheet demo
Well look at using
Excel functions to
solve lease
problems
=NPV
=IRR
=PMT
=PV
=FV