ADMS 3530 Winter 2012 – Professor Lois King
Lecture 3 – Time Value of Money (Part 2/2) – Jan 17
3.1 Annuities & Perpetuities Due
− PV ordinary annuity = cash payments at end of each period.
− FV ordinary annuity = cash payments at end of each period.
− Ordinary or regular annuities = cash flows occur at the end of each period.
− Annuities due = cash flows occur at the beginning of each period.
3.1 Summary – PV & FV Annuity Due
− There are 2 ways to find the PV or FV of an annuity due:
o Multiply the PV or FV or an ordinary annuity by (1+r).
o Use your calculator and change the function mode to BGN and input the variables
the same way as you did for an ordinary annuity.
− Note: a third way would be to work out the PV or FV of each cash flow separately, but
this is usually not practical for most annuities as the number of payments tends to be
3.1 Perpetuities Due
− Recall, PV of an ordinary perpetuity = C/r
− Note: this formula gives you the present value for a perpetuity whose first payment
occurs at the end of the first period.
3.2 Growing Perpetuities & Annuities
− There is an easy way to solve problems that involve cash flows which are not identical,
but which are growing at a constant rate.
− Growing perpetuity:
o An infinite stream of cash flows growing at constant rate.
PV growing perpetu1tyrg)
o C1 = cash flow at end of period 1
o r = period interest rate.
o g = constant growth rate of cash fl ws 3.3 Inflation & Time Value of Money
− Inflation – an overall increase