with an uneven stream of future cash flows, the present value is
determined by discounting all of the cash flows back to the present and then adding the present value. is there ever a time when you can treat some of the cash flows as annuities and apply the
annuity techniques
PV( Annuity Due) =PMr[i1a+r1](1+0 6.2 Calculate the present value of a level perpetulty and a growing perpetuity. (ogs. 206-207) SUMMAPY: A perpetuity is an annuity that continues forever. That is, every period it pays the same dollar amount. With a growing perpetuity, rather than meceiving the same amount each period, the periodic payyment in Period, the periodic payment increases at a constant nate every period. KEY TERMS KEY TERMS Growing perpetulty, page 205 An annuity. in which the payments grow at a coestant rate from period to period over an iafinite life. Perpetuity, page 205 An annary with an Level perpetuity, page 205 An annoity with a infinite dife. constant level of payments over an infinite life. KEY EQUATIONS 6.3 Calculate the present and future values of complex cash flow streams. (pge, 208-211) SUMMAPY: Understanding how to make cash fows that occur in different time periods comparable is essential to understanding finance. All time value formalas presented in this chapter and in the previous chapter stem from the single compounding formala FVn=PV(1+i). Many times projects or investments involve combinations of eash flow- for example, discounting single flows, compounding annuities, and discounting annuities-and we find the present value of these complex combinations by calculating the present value of each cash flow and them adding the present values together. Hons 6-1. What is an annuity? Give some examples of annuities. 6-2. How do you calculate the future value of an annuity? 6-3. What is the relationship between the present value interest factor (from Chapter 5 ) and the annuity present value interest factor (from Equation [6-2])? 6-4. Assume you bought a home and took out a 30-year mortgage on it 10 years ago. How would you determine how much principal on your mortgage you still have to pay off? 6-5. Distinguish between an ordinary annuity and an annuity due. 6-6. What is a level perpetuity? A growing perpetuity? 6-7. How do you calculate the present value of an annuity? A perpetuity? A growing perpetuity? H Wid un unen stream of future cash flows, the present value is determined by dis. autily du of the cash flows back to the present and then adding the present values b tere set a time when you can treat some of the cash flows as annuities and apply tr anity tachniques you learned in this chapter
