OBJECTIVES (Slide 4-2)

1. Compute the future value of multiple cash flows.

2. Determine the future value of an annuity.

3. Determine the present value of an annuity.

4. Adjust the annuity formula for present value and future value for an annuity due and

understand the concept of a perpetuity.

5. Distinguish between the different types of loan repayments: discount loans, interestonly loans, and amortized loans.

6. Build and analyze amortization schedules.

7. Calculate waiting time and interest rates for an annuity.

8. Apply the time value of money concepts to evaluate the lottery cash flow choice.

9. Summarize the ten essential points about the time value of money.

IN A NUTSHELL

In Part two of this 2-part unit on the time value of money topic, the author discusses and

illustrates how the time value of money equation can be modified and used for calculations

involving the compounding and discounting of interest in cash flow streams that are more

complex that mere lump sums. Real life situations seldom involve single outflow/inflow

types of cash flow streams. More often, we are faced with periodic outflows such as loan,

rent, or lease payments and/or periodic inflows such as retirement annuities. In this chapter,

we learn how to calculate the present and future values of more complex cash flow streams

such as those involving unequal cash flows, ordinary annuities and annuities due. In

addition, the different methods by which loans can be paid off; and the method of setting

up and analyzing amortization schedules associated with mortgages and other installment

loans are also covered.

LECTURE OUTLINE

4.1 Future Value of Multiple Payment Streams (Slides 4-3 to 4-7)

In the case of investments involving unequal periodic cash flows, we can calculate the

future value of the cash flows by treating each of the cash flows as a lump sum and

calculate its future value over the relevant number of periods. The individual future valu