How to Calculate Present Values

Present Value of a single CF

The present value of a single cash
flow C expected n years from now is
given by:-

You can also use the PVIF table

PVIF Table

Future Value of a single CF

The

future value of a single cash flow

C at a time n years from now is given
by:C*
You can also use the FVIF table

FVIF Table

Perpetuity
is when the same cash flow C is
Perpetuity

paid every year for an infinite period

C is the periodic cash-flow

r is the discount rate
PV is the present value of this cash flow
stream
Example C=100, r=10%
PV=1000

Growing Perpetuity
the cash flows paid out every year grow at
When

constant rate of growth g

C1 is the cash-flow at the end of year 1

r is the discount rate
g is the growth rate
PV is the present value of this cash flow stream
Example C1=100, r=10%, g=5%
PV=2000

PV of Annuity
the same cash flow C is paid out for n
When

years

C is the periodic cash-flow

r is the discount rate
n is the number of periods for which the cash
flow will last
PV is the present value of this cash flow stream
If n is in months, this is the EMI (Equated
Monthly Installments) formula

PVIFA Table
Alternatively, the PVIFA table can
also be used to calculate the PV of an
annuity

FVIFA Table
To calculate future value of an
annuity, you can use the FVIFA table

2-14
Factory costs 800,000
Produces 170,000 for 10 years
Find
A. Its NPV if r = 14%
(86,739.66)

B. Value of factory at the end of 5 years

(583,623.76)

2-25
If r= 8%, what amount needs to be set
aside for
A perpetuity of 1 bn
12.5 bn

Perpetuity of 1 bn growing at 4%
25 bn

1 bn for 20 yrs
9.82 bn

1 bn spread evenly over the year for 20 yrs

10.20 bn

2-34
Couple retires in 3 yrs
Needs 15k per month, gets 9k from
other sources
Has a fund of 1,000,000
Fund grows at 3.5%
For how many years can withdrawals
be made?
21.38 yrs

2-39
Pipeline generates 2 mn in year 1
Cash flows declining by 4% p.a.
If r= 10%, find: PV of pipeline if cash flows continue forever
14.29 mn

PV of pipeline if cash flows last for 20 years

13.35 mn
Can we use Value perpetuity minus TV in yr 21?

Growing Annuity
the cash flows paid out every year grow at
When

constant growth rate g and are paid for n years

C1 is the cash-flow at the end of year 1

r is the discount rate
g is the growth rate
n is the number of periods for which the cash
flow will last
PV is the present value of this cash flow stream

Cash flows starting at beginning of year

All the present value formulae above assume
that cash flows start at the end of year 1. If cash
flows start at the beginning of year (first cash
flow is at time 0), then the present values can be
calculating by multiplying all the above PV
formulae by an additional (1 + r) factor
The rationale is that is cash flows start at time 0,
then every cash flow is effectively being
discounted for one less year than assumed in
the formulae in the previous slides

Calculating Future Values

To
calculate the future value of a stream of cash

flows (the value of all cash flows at the end of

year n instead of their value at time 0), all the
present value formulae must be multiplied by the
factor

Compounding at higher frequencies

To compound at higher frequencies, divide the
rate by number of periods per year and multiply
the time (in years) by number of periods per
year
For continuous compounding, use exp(rt) as the
compounding factor

Different rates of borrowing and lending

We need to consider each cash flow individually
Example: Rate of borrowing is 12%
Rate of lending is 10%
Calculate the value of the project at the end of its life
cycle
Year

CF

-55

60

80

-85

Different rates of borrowing and

lending

Year

CF

-55

60

80

-85

Amount Left after

repayment in Yr 2

Amount invested at
year 3

Amount left at the end

of the project

-1.60
78.21
1.0288