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Notes from 1.011, Lecture 8 (February 24, 2003) Not for General Distribution Converting Between a Series of Cash Flows, Present Value, Annuities, and Future Value. • Convert a series of cash flows into present value use (cash flow)*(P/F, I%, t) • Choose interest rate i% to be the average cost of capital or the opportunity cost of resources • Sum all the present values • Convert the present value into future values or annuities as desired use (present value)*(F/P, i%, t) or (present value)*(A/P, i%, N) • Annuities are paid back at the ends of each periods, while the equivalent present value of the annuity is incurred at the beginning of the period• Future value is more than the present value: $1 is worth more today than tomorrow • Payment of $100 moved one year into the future would be $100*(1+i%) • Payment of $100 moved one year back to the past would be $100/(1+i%) • Nominal interest rate is discrete • Effective interest rate is continuously compounded • Converting from nominal to effective, use effective = e(nominal) -1. See note on equivalence (Prof. Martland), in your


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MIT 1 011 - Lecture Notes

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