(7.2) A present value is the amount which must be invested today, at a specified to grow the initial investment to a specified , at a specified amount of the calculation of a present value is called discount rate The PV is depended on three values: the , the , and the The rate used in the (7.3) The basic PV equation as follows: PV- basic PV equation so the PV is determined by multiplying the future value (FV) times the Or, we can rearrange the of the FV interest factor: PV = . The term [1/(1 +ry] - is called the present value interest factor and is abbreviated, . The PVIF is also called the and calculating the present value of a future cash flow to determine its worth today is commonly called valuation. (7.4) A FV with multiple cash flows can be computed by finding the of each deposit and then summing the separate cash flows can be calculated by separately computing the flow and then summing the separate A PV with multiple of each cash (7.5) An annuity is a series ofcash flows that occur ato each period for some of the time period, the annuity is referred to as an are at the beginning of the time period, we call the annuity an number of periods. When the payments occur at the end annuity form. If payments 2, where the term in (7.6) The PV of an annuity formula is: Cx t parentheses is sometimes called and abbreviated (7.7) The FV of an annuity formula is: FV-Cx, where the term in parentheses is sometimes called stream of cash flows continues (7.8) A perpetuity is a an annuity with the The PV of a perpetuity formula is: PV- C, and written as: C = The formula can also be solved for . It can also be solved for r:r- (7.9) The interest rate expressed in terms of the interest payment made each period is called a interest rate. When interest interest rate or a rate is compounded more than once a year, the actual interest rate is th the quoted interest rate. The actual interest rate is calledThe afo actual interest rate can be computed as follows: [11, where m is the number of times per year interest is compounded. When interest is compounded m times per year, the future value equals an (7.10) The three basic types of loans are pure loans, interest-only loans, and amortized loans. A pure discount loan is a loan with which the borrower receives money today and repays a at some time in the future. The second type of loan repayment plan, called each period and to repay the interest-only loans, calls for the borrower to pay entire to repay parts of the loan amount over time; i.c. the borrower make periodic payment which include both interest paid in this case (grows /declines) each period, because the loan balance is going down. at some point in the future. An amortized loan requires that the borrower and repayment of a portion of the . Notice that the
