What Is Your Understanding of the Following Concepts; Present Value, Present Value of an Annuity, Future Value, and Future Value of an Annuity. (Please Describe Any Formulas Related to Each.)

Topics: Time value of money, Time, Net present value Pages: 1 (325 words) Published: January 28, 2012
Present Value is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.

Present Value of annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period; For an annuity due. PVoa = PMT [(1 - (1 / (1 + i)n)) / i]

Future Value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. There are two ways to calculate FV: For an asset with simple annual interest: = Original Investment x (1+ interest rate *number of years)) 2) For an asset with interest compounded annually: = Original Investment x ((1+interest rate)^number of years)

Future value of annuity is the value of a group of payments at a specified date in the future. These payments are known as an annuity, or set of cash flows. The future value of an annuity measures how much you would have in the future given a specified rate of return or discount rate. The future cash flows of the annuity grow at the discount rate and the higher the discount rate, the higher the future value of the annuity.

The current value of a set of cash flows in the future, given a specified rate of return or discount rate.The future cash flows of the annuity are discounted at the discount rate, and the higher the discount rate, the lower the present value of the annuity.
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