present value calculations

W

winw

New member
Joined
Sep 28, 2011
Messages
16
when does the present value of the perpetuity formula bring the cash flows back to? the period where the cash flows start of the period before?
how about the present value of an annuity formula? is that one the period when the cash flows start? present value of a growing annuity bring it back to the year before the cash flows start right?

Thanks
 
winw said:
...the present value of an annuity formula?...
Click to expand...

I'm struggling with this statement. Does an annuity formula have a future value? Formulas are pretty cheap, annuities or not.
 
Last edited:
Right, so how much is that formula worth, right now?

Words, people. Words mean things.
 
sorry, what I meant was that say for example, if you have a stream of cash flows starting at period 2 and lasting for, say 5 years, when you use the formula [(1-(1/(1+r)^5))/1+r]PMT would that bring back the cash flows to period 2 or period 1. But from the explanations here, I would think it would bring it back to period 2.
 
This is the problem with these formulas. They are not well understood and the often lead to confusion. Seriously, build them yourself and NEVER wonder again.

"if you have a stream of cash flows starting at period 2 and lasting for, say 5 years"

Given an interest rate, i, a discount rate v = 1/(1+i), and d = i*v

Starting at t = 1, we have PMT*(1 + v + v^2 + v^3 + v^4) -- See how this if five payments? See how EACH payment is discounted to t = 1 (the beginning of period 2)?

Now, add them up: \(\displaystyle PMT\cdot\frac{1-v^{5}}{1-v} = PMT\cdot\frac{1-v^{5}}{i\cdot v} = PMT\cdot\frac{1-v^{5}}{d}\) -- And THERE we have a formula that we KNOW discounts your five payments to t = 1, looking at them from t = 1. Notice how this is the same as discounting five payments to t = 0, looking at them from t = 0. Constant interest will do that.
 
You must log in or register to reply here.
Top