Page 68 - DMGT302_FUNDAMENTALS_OF_PROJECT_MANAGEMENT

Unit 4: Project Budgeting

where, Notes

PV = Present value of a cash flow stream
n
A = Cash flow occurring at the end of year t
t
r = Discount rate

n = Duration of the cash flow stream
Future Value of Annuity

An annuity is a stream of constant cash flow (payment or receipt) occurring at regular intervals
of time. The premium payments of a life insurance policy,
For example, are an annuity.

In general terms the future value of an annuity is given by the following formula:
n-2
FVA = A (1+r) + A (1+r) + ... +A
n-1
n
= A 1(1+r) - 1] /r
n
Where,
FVA = Future value of an annuity which has a duration of n periods
n
A = Constant periodic flow
r = Interest rate per period
n = Duration of the annuity

When the cash flows occur at the end of each period, the annuity is called an ordinary annuity or
a deferred annuity. When the cash flows occur at the beginning of each period, the annuity is
called an annuity due. Our discussion here will focus on a regular annuity the formulae of course
can be applied, with some modification, to an annuity due.

Self Assessment

State whether the following statements are True or False:
6. Akin to ....................... notes, debentures are instruments for raising debt capital.

7. ....................... margin and pre operative expenses provided in estimating the cost of project
should be added to the fixed assets proportionately to ascertain the value of fixed assets
for determining the depreciation charge.
8. ....................... expenses in excess of 2.5 per cent of the project cost
9. The liabilities side of the ....................... shows the sources of finance employed by the
business
10. An ....................... is a stream of constant cash flow (payment or receipt) occurring at regular
intervals of time.

Notes The items on the financing side of the balance sheet are called capital components.
The major capital components are equity, preference, and debt.

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