Interest rate 0.
1
Number of Periods 2
Discount factor 0.826446281
Interest rate factor 1.21
Present values
2772357
9875975
847
1
5437
Here I take arbitrarily an interest rate of 10%
Some random examples
Future value in 10 years
3354551.97
11949929.75
1024.87
1.21
6578.77
PV
1000
27720.8449015973
Present values
2772357
9875975
847
1
5437
In 2 years with r=10%
1210
1000000 C
0.08 discount
year 1 1 925925.93 sum 11158406
year 2 2 857338.82
year 3 3 793832.24 1000000
year 4 4 735029.85
year 5 5 680583.2
year 6 6 630169.63 Answer: 12158406
year 7 7 583490.4
year 8 8 540268.88
year 9 9 500249 11158406
year 10 10 463193.49
year 11 11 428882.86
year 12 12 397113.76
year 13 13 367697.92
year 14 14 340461
year 15 15 315241.7
year 16 16 291890.47
year 17 17 270269
year 18 18 250249
year 19 19 231712.06
year 20 20 214548.21
year 21 21 198655.75
year 22 22 183940.51
year 23 23 170315.28
year 24 24 157699.34
year 25 25 146017.9
year 26 26 135201.76
year 27 27 125186.82
year 28 28 115913.72
year 29 29 107327.52
C= 10000
year r=10% Sum
year 65 10000 0 1644940
year 64 11000 1
year 63 12100 2
year 62 13310 3
year 61 14641 4
year 60 16105.1 5
year 59 17715.61 6
year 58 19487.171 7
year 57 21435.888 8
year 56 23579.477 9
year 55 25937.425 10
year 54 28531.167 11
year 53 31384.284 12
year 52 34522.712 13
year 51 37974.983 14
year 50 41772.482 15
year 49 45949.73 16
year 48 50544.703 17
year 47 55599.173 18
year 46 61159.09 19
year 45 67275 20
year 44 74002.499 21
year 43 81402.749 22
year 42 89543.024 23
year 41 98497.327 24
year 40 108347.06 25
year 39 119181.77 26
year 38 131099.94 27
year 37 144209.94 28
year 36 158630.93 29
year 35 she puts nothing
29
With the formula. Warning! With the formula you need to take the number of payments into account! Her
1644940
ts into account! Here 30 and not 29!
Problem 1
Suppose that a young couple has just had their first baby a
money will be available to pay for their child's college educ
books, fees, and other costs, average $12,500 per year. On
historically increased at a rate of 4% per year.
Assuming that costs continue to increase an average of 4%
for one year for this student in 18 years when she ent
A) $12,500
B) $21,500
C) $320,568
D) $25,323
Simple warm-up
25.3227064422317
C 12500
r 4%
n 18
FV 25322.706442
had their first baby and they wish to ensure that enough
r child's college education. Currently, college tuition,
$12,500 per year. On average, tuition and other costs have
er year.
ase an average of 4% per year, tuition and other costs
years when she enters college will be closest to:
sure that enough
ollege tuition,
nd other costs have
nd other costs
e closest to:
Problem 2
Joe just inherited the family business, and having no desire to
exchange for the family business, Joe has been offered an im
one year, $50,000 in two years, and $50,000 in three years.
In terms of present value, how much will Joe receive for selli
1) you have an immediate PV of 100,000 100000
2) you need to compute an annuity of 3 years for C = 50,000 50000
Interest rate 0.06 PV year 1
Number of Periods 1 47169.811
Discount factor 0.94339623
Interest rate factor 1.06
Interest rate 0.06 PV year 2
Number of Periods 2 44499.822
Discount factor 0.88999644
Interest rate factor 1.1236
Interest rate 0.06 PV year 3
Number of Periods 3 41980.964
Discount factor 0.83961928
Interest rate factor 1.191016
Sum
133650.6
SOLUTION: PV(annuities)
C 50000
r 6%
n 3
P 100000
$ 233,651
Annuities es cuando dan pagos constantes en un periodo.
ng no desire to run the family business, he has decided to sell it to a
offered an immediate payment of $100,000. Joe will also receive pa
three years. The current market rate of interest for Joe is 6%.
eceive for selling the family business?
Answer
233650.597473082
Or
With P=C/r !!!!
133650.597473082
100000
233650.597473082
d to sell it to an entrepreneur. In
also receive payments of $50,000 in
Joe is 6%.
Problem 3
Joe just won the “win for life” lottery and will get $50,000 ev
the time line (C = 50,000).
In terms of present value, how much will Joe receive if he ne
Just use the formula
1666666.66666667
SOLUTION
FV(perpetuity)
1666666.66666667
t $50,000 every year forever, starting from period 1 on
eive if he never dies and the interest rate is 3%?
Problem 4
Suppose that a young couple has just had their first baby an
for their child's college education. Currently, college tuition,
average, tuition and other costs have historically increased a
Assuming that college costs continue to increase an average
account paying 7% interest.
Find the amount of money she will need to have available at
(assume that you pay the fee at the beginning of the year, ye
Find the cost for the beginning of the 1st year (year 18 = year
Draw a time line of the outflows
Compute the present value of the growing outflow
1) We did it in exercise 1
25322.7064422317
2) Draw the time line year 18 year 19 year 20 year 21
(growing annuity outflow) 25322.706 26335.615 27389.039 28484.6009
3) Compute the value at year 18
year 18 year 19 year 20 year 21
Values at beginning of year 18 25322.7064422 24612.724 23922.648 23251.919
With r = 7%
0.07
Sum 97109.9973108
SOLUTION
C $ 12,500
r 4%
n 18
r2 7%
Year 0 $ 25,323 Formula $ 97,110
Year 1 $ 26,336
Year 2 $ 27,389
Year 3 $ 28,485
Accounts savings
Year 1 = 18 años $ 25,323
Year 2 = 19 años $ 24,613
Year 3 = 20 años $ 23,923
Year 4 = 21 años $ 23,252
TOTAL $ 97,110
heir first baby and they wish to ensure that enough money will be av
y, college tuition, books, fees, and other costs, average $12,500 per
cally increased at a rate of 4% per year.
ease an average of 4% per year and that all her college savings are
ave available at age 18 to pay for all four years of her undergradu
g of the year, year 0 = year 18).
r (year 18 = year 0)
utflow
Or you can use the formula directly
97109.997310753
money will be available to pay
age $12,500 per year. On
lege savings are invested in an
her undergraduate education
