Untitled-29

(^42) Financial Management

( 1 )

( 1 )

[( 1 ) 1 ]

Pr i

i i

i

esentValue A n

n

 +











+

+ -

=

In the excel spreadsheet we just have to change the type to 1 to get the desired result.

The result now comes to Rs 91,597.25, which is nothing but the earlier figure of Rs

87,235.47 multiplied by 1.05 (i.e. 1+i).

Perpetuity

If the annuity is expected to go on forever then it is called a perpetuity and then the

above formula reduces to:

i

PresentValue=A

Perpetuities are not very common in financial decision making as no project is expected

to last forever but there could be a few instances where the returns are expected to be

for a long indeterminable period. Especially when calculating the cost of equity perpetuity

concept is very useful.

For a growing perpetuity the formula changes to:

i g

esentValue A

Pr =

All these calculations take into consideration that the cash flow is coming at the end of

the period.

Valuing Securities

The objective of any investor is to maximise expected returns from his investments,