ECON 203 1nd Edition Lecture 37Outline of Last Lecture I. comparative advantagea. self sufficiencyb. specializationc. definitiond. exampleOutline of Current LectureI. Present valuation a. Definitionb. Examplec. Real interest rated. Formulae. Examplef. Exampleg. Perpetuity Current LectureI. Present Valuationa. Definition- differently dated dollars are different economic goods. b. Ex: suppose you have a choice of getting $100 today or $100 in a year. Most people will choose to get the $100 today instead of waiting for the money. What would it take for you to accept the money today?c. Real interest ratei. Some people may accept $90 today instead of $100 in a year. The real interest rate, r, is the premium for earlier availability of goods. In this case, r=0.1 or 10% to accept money now vs. laterd. To find the value of something now vs. later, use PV= FV/(1+r)n PV= present valueFV= future valuer= interest raten= number of years until maturitye. Ex: what is $1000 in 1 year worth right now if r=5%?PV= 1000/ (1+0.05)1 = 952.38These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.What about if r=10%?PV= 1000/ (1.10)1 = 909.05This shows that as r increases, PV decreasesf. Ex: what is $1000 in 1 year and then $1000 in 2 years worth now if r=10%?PV= 1000/ (1.1)1 + 1000/ (1.1)2 = 1735.53 g. Perpetuity- the option to be paid a set amount of money every set amount of time foreveri. PVperpetuity = (annual CF)/ rCF=cash flowii. If you get paid $50 every year for the rest of your life PV= 50/0.05=
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