Week 2 - Time value of money II

Question 1

Annuity with growth

Answer 1

1. Timing of cash flows occur at constant intervals.
2. CONSTANT growth rate (g) & discount rate (r)
3. PV valuation point is 1 PERIOD BEFORE the first cash flow

If the cash flow occurs eg. between t=0 and t=1, you must use the effective monthly rate. Not always effective annual rate

Question 2

Annuity

Question 3

Perpetuity with growth

Answer 3

Same characteristics as annuity with growth + DISCOUNT RATE > GROWTH RATE, r > g

Question 4

Perpetuity

Question 5

How to calculate PV of annuity due?

Answer 5

PV of (n-1) cash flows + C at t=0

Question 6

How to calculate FV of annuity due?

Answer 6

Find the PV at t=0 then multiply by (1+r)^n