Calculation of present value
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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 |