CHAPTER 2:

EXPONENTS AND
LOGARITHMS

PREPARED BY: INVESTMENT DEPARTMENT

COURSE CODE: B03013

3/6/2024 B02005 – Chapter 0: Introduction 1
 LEARNING OBJECTIVES

Introduce the present value/future value

Define the form of the annuities.

Define the form of the perpetuity.

Excel functions

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 Time value of money

The time value of money is a financial

principle that states the value of a dollar
today is worth more than the value of a dollar
in the future.

• You have won a cash prize. You have two

options available to you.
A) receive $10,000 now, or
B) Receive $10,000 in 3 years.
• Which do you choose?

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 Present value – Future value

• Future value (FV): amount to which an investment will

grow after earning interest.
• Present value (PV): value today of a future cash flow.
• We deposit $A into a savings account which pays
interest at a simple annual interest rate r.
• How much we will receive after 1 year? 2 years? n
years?
After 1 year: After t years:
A + r*A = A(1+r) A(1+r)t

After 2 years:
A(1+r)2

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 Present value – Future value

• Cash flow
𝑭𝑽 −𝒕
𝑷𝑽 = 𝑭𝑽 ∗ 𝟏 + 𝒓 = 𝒕
,
𝟏+𝒓
𝑭𝑽 = 𝑷𝑽 ∗ 𝟏 + 𝒓 𝒕
• Multiple cash flow
𝑪𝑭𝟏 𝑪𝑭𝟐 𝑪𝑭𝒏 𝑵 𝑪𝑭𝒕
𝑷𝑽 = + +⋯+ = σ𝒕=𝟏
𝟏+𝒓 𝟏 𝟏+𝒓 𝟐 𝟏+𝒓 𝑵 𝟏+𝒓 𝒕

𝑵
𝒕
𝑭𝑽 = ෍ 𝑪𝑭𝒕 ∗ 𝟏 + 𝒓
𝒕=𝟏

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 Annuities

• An annuity is a sequence of equal payments at regular

intervals over a specified period of time. (CF1 = CF2 =
...= CFn = CF)
• Compounded interest
𝑵
𝑪𝑭 𝑪𝑭 𝑪𝑭 𝑪𝑭
𝑷𝑽 = 𝟏
+ 𝟐
+ ⋯+ 𝑵
=෍ 𝒕
𝟏+𝒓 𝟏+𝒓 𝟏+𝒓 𝟏+𝒓
𝒕=𝟏

𝑭𝑽 = ෍ 𝑪𝑭 𝟏 + 𝒓 𝒕

𝒕=𝟏

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 Perpetuity

• A perpetuity is a sequence of equal payments (CF) that

continue forever or for an indefinite duration without
end.
𝑪𝑭
𝑷𝑽 = → 𝑪𝑭 = 𝑷𝑽 ∗ 𝒓
𝒓

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 Annuities
Asset Year of Payment Present Value
1 2…..t t+1
Perpetuity (first C
payment in year 1) r

C  1
Perpetuity (first payment  
 r  (1  r )
t
in year t + 1)

Annuity from year  C   C  1 

     
t 
1 to year t    
r r (1  r ) 

𝑵 −𝑵
𝑪𝑭 𝑪𝑭 𝑪𝑭 𝟏 𝑪𝑭 ∗ 𝟏 − 𝟏 + 𝒓
𝑷𝑽 = ෍ = − =
𝟏+𝒓 𝒕 𝒓 𝒓 𝟏+𝒓 𝑵 𝒓
𝒕=𝟏
𝑪𝑭 ∗ [ 𝟏 + 𝒓 𝑵 − 𝟏]
𝑭𝑽 =
𝒓
 Annuities

• Compounded interest
𝑵
𝑪𝑭 𝑪𝑭 𝑪𝑭 𝑪𝑭
𝑷𝑽 = 𝟏
+ 𝟐
+ ⋯+ 𝑵
=෍ 𝒕
𝟏+𝒓 𝟏+𝒓 𝟏+𝒓 𝟏+𝒓
𝒕=𝟏
𝑵 −𝑵
𝑪𝑭 𝟏 𝑪𝑭 ∗ [𝟏 − 𝟏 + 𝒓 ]
→ 𝑷𝑽 = 𝟏− =
𝒓 𝟏+𝒓 𝒓
𝑷𝑽 ∗ 𝒓
→ 𝑪𝑭 𝑨𝒏𝒏𝒖𝒊𝒕𝒚 = −𝑵
𝟏− 𝟏+𝒓

𝑪𝑭 ∗ [ 𝟏 + 𝒓 𝑵 − 𝟏]
𝑭𝑽 =
𝒓

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 Constant growth

• In the case of cash flow with growing rate g:

𝐶𝐹1 𝐶𝐹0 (1 + 𝑔)
𝑃𝑉0 = =
𝑟−𝑔 𝑟−𝑔
g: the annual growth rate of the cash flow.

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 Excel functions

Function Arguments Purpose

Calculates the present value of a future
PV rate, nper, pmt, [fv], [type]
amount (or series of future payments).
Calculates the future value of an investment
FV rate, nper, pmt, [pv], [type]
based on regular periodic payments.
Calculates periodic payments for a loan or
PMT rate, nper, pv, [fv], [type]
investment with a fixed interest rate.
Calculate the interest rate per period of an
RATE nper, pmt, pv, [fv], [guess]
annuity
Calculates the net present value of a series of
NPV rate, values
cash flows over time.
Calculates the internal rate of return for a
IRR values, [guess]
series of cash flows.

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 Excel functions

• Arguments (Explanation)
• rate: The interest rate per period.
• nper: The total number of payment periods.
• pmt: The periodic payment amount.
• pv: The present value or lump sum.
• fv: The future value (optional).
• type: 0 or omitted for end-of-period payments, 1 for
beginning-of-period payments (optional).
• values: A range of cells containing cash flows.
• guess: An optional initial guess for the solution (IRR
function
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 Exercise 1

You want to buy a 4-seat Lexus car worth 1.5

billion VND in installments. The supplier and you
agree to the following plan: pay 30% of the car’s
value in advance and pay the remainder of 50
million VND each month for 24 consecutive
months. The cash flow discounted interest rate
is 8% per year.
1. Please calculate the value of the car using
this installment payment method.
2. Calculate the installment interest rate?

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 Exercise 2

• Hoang Anh company is planning to invest in a

project with the following cash flow:
Year 0 1 2 3 4 5
Cash-flow
(end of -3500 -850 1600 1500 1800 1700
year)

• Calculate Net Present Value with discount rate

r = 10%

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 Exercise 3
• Given the following cash flow:
Year 0 1 2 3 4 5 6
Cash-flow
(end of year)
-1200 800 1400 300 350 200 -2300

• Will you choose to invest in this project, if the

interest rate is:
1. r = 7%
2. r = 15%
Explain your answer.
Draw a graph to analyze and give comments on the
sensitivity of NPV when the discount rate changes.

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 Exercise 4

• There are two projects:

Project 0 1 2 3 4 5 6

A -2000 450 600 600 430 400 350

B -1400 350 400 400 350 320 320

• The two projects conflict with each other (mutually

exclusive) and the desired rate of return is at least 8%.
Select the project based on sensitivity analysis of NPV
with respect to the project discount rate

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 Exercise 5

• A bond with par value 1,000,000 VND, mature

in 5 years. Coupon rate is 8% annually. At the
time of issue, the expected rate of return is 9%
annually.
• Calculate price of the bond.
• If that bond is currently selling at 999,780 VND.
Should you buy it? Why?

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 Exercise 6

• Twelve bonds have just been issued with a

price of 11,688,000 VND each. The face value
is 1 million VND, with a maturity of 10 years
and a coupon rate of 7.8%, paid annually. At
the end of the 8th year, how much do you need
to sell each bond for to achieve a return rate of
10.9% per year for the first 8 years? Use
Excel’s Goal Seek to find the answer.

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 Exercise 7

• Company X paid a 40% dividend last year. The

current price of X’s shares is 18,000 VND per
share, with a face value of 10,000 VND. In the
first year, the growth rate is expected to be
30%, followed by 20% in the second year and
15% in the third year. From the fourth year
onward, the growth rate is 10% per year.
Calculate the fair price of this share if investors
require a rate of return equal to the bank
deposit rate of 20%.

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 Exercise 8

• Given the following dividend payout of

company X:

Year 2009 2010 2011* 2012* 2013*

Dividend 1820 1600 2650 1920 1960

• From 2014 onward, the growth rate of

dividends is 10% per year. The required rate of
return is 12% annually. Calculate the fair price
of that stock.

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