1. Define PV, FV, PVA, FVA, and PV . using an example with close relevance to you. The example may be professionally (e.g., issuing bonds and stocks of your corporation) or personally (e.g., investing your retirement assets) related to you.
1) | PV: | |
Refers to the Present Value of a Future | ||
Lump sum to be received when discounted | ||
at the appropriate rate. | ||
The formula for finding PV of a lump sum is | ||
PV = FV/(1+r)^n | ||
where, r = the discount rate and n = the # of | ||
years or periods | ||
Example: | ||
I have an obligation to make a payment of | ||
$5000 to my friend after 5 years. If I wish to | ||
settle the amount today I need pay only its | ||
PV when discounted at a rate agreeable to | ||
my friend. | ||
If such rate is 5%, the amount to be paid | ||
today = 5000/1.05^ 5 = | $ 3,918 | |
2) | FV: | |
FV is the opposite of PV and represents the | ||
future value of a lump sum today. | ||
FV = PV*(1+r)^n | ||
Example: | ||
I have made a deposit of $5000 in a bank | ||
which pays interest at 5%, compounded | ||
annually. If the maturity is 5 years, the | ||
value of the deposit with interest will be | ||
5000*1.05^5 = | $ 6,381 | |
3) | PVA: | |
PVA means PV of annuity. Annuity is series | ||
of equal payments for a specified number | ||
of periods. | ||
The PV of annuity = [(1+r)^n-1]/[r*(1+r)^n] | ||
I needed an annuity of $500 (yearly) for 25 years | ||
for which I approached an Insurance co. | ||
The company asked me to pay the PV of the | ||
annuity, the discount rate being 3% p.a. | ||
The PV of annuity or the amount payable today to purchase the annuity = 500*(1.03^25-1)/(0.03*1.03^25) = | $ 8,707 | |
4) | FVA is the opposite of PVA. | |
It is given by the formula: | ||
FVA = [(1+r)^n-1]/r | ||
Example: | ||
I plan to save $500 for 5 years at the end of each | ||
year. If I can earn an interst rate of 3% compounded | ||
annually, the FV of this annuity will be: | ||
500*(1.03^5-1)/0.03 = | $ 2,655 |
1. Define PV, FV, PVA, FVA, and PV . using an example with close relevance to...
Present and future value tables of $1 at 11% are presented below. PV of $1 FV of $1 PVA of $1 FVA of $1 1 0.90090 1.11000 0.90090 1.0000 2 0.81162 1.23210 1.71252 2.1100 3 0.73119 1.36763 2.44371 3.3421 4 .65873 1.51807 3.10245 4.7097 5 0.59345 1.685061 3.69590 6.2278 | 6 | 0.53464 1.87041 | 4.23054 7.9129 Titanic Corporation leased executive limousines under terms of $20,000 to be paid at the inception of the lease, and four equal annual payments...
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You have decided to buy a used car. The dealer has offered you two options: (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) a. Pay $660 per month for 25 months and an additional $12,000 at the end of 25 months. The dealer is charging an annual interest rate of 24%. b. Make a one-time payment of $18,850, due when you purchase the car. 1-a. Determine how...
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