Difference between revisions of "Calculation of present value"

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Latest revision as of 19:23, 27 August 2020

The table below lists different financial securities and how you can determine the present values of these:

Year 0 1 2... ...t-1 t t+1 Present Value When to use?
Perpetuity 1 1... 1 1 1... \[\large \frac{1}{r}\] Use this for an infinite series of yearly payments
t-period Annuity 1 1... 1 1 \[\large \frac{1}{r} - \frac{1}{r(1+r)^t}\] Use this when you get a fixed sum paid each year for <t> periods
t-period Annuity Due 1 1 1... 1 \[\large (1+r)*(\frac{1}{r} - \frac{1}{r(1+r)^t})\] Same as the t-period annuity but payments start immediatly
Growing Perpetuity 1 \[1*(1+g)\] \[1*(1+g)^t-2\] \[1*(1+g)^(t-1)\] \[1*(1+g)^t\] \[\large \frac{1}{r-g}\] Use this for perpetuities where a yearly, growing cost g is involved
Growing Annuity 1 \[1*(1+g)\] \[1*(1+g)^(t-2)\] \[1*(1+g)^(t-1)\] \[\large (\frac{1}{r-g} - \frac{1}{r-g} * \frac{(1+g)^t}{(1+r)^t})\] Use this for annuities that grow at rate g