Module 6.2: Calculating PV and FV

Question 1

What is the formula for FV given a single cash flow?

Answer 1

FV = PV (1 + I/Y)^N

I/Y = rate of return per compounding period
N = total number of compounding periods

Question 2

What is the formula for PV given a single cash flow?

Answer 2

PV = FV / (1+I/Y)^N

I/Y = rate of return per compounding period
N = total number of compounding periods

Question 3

What is an annuity?

What is an ordinary annuity?

What is an annuities due?

Answer 3

Stream of equal cash flows that occurs at equal intervals over a given period.

Ordinary annuity - is the most common type, characterized by cash flows that occur at the end of each compounding period.

Annuity due - where payments or receipts occur at the beginning of each period.

Question 4

How do you calculate PV or FV of an annuity when the payments down start at t=0

Answer 4

Step 1 - find the present value of the annuity as of the start date.

Step 2 - Find the present value of the value from step 1 to t=0 - note that for step 2, the N is usually N-1 because the calculator is set to “end”