This chapter helps you build expertise in calculating present values. The lessons learned in Chapter 2 form the foundation for the chapter. We start with the cash flow one year from now and extend the basic approach to the computation of present value of any stream of cash flows. It is very useful to learn short cuts to calculate the present values of three special types of cash-flow streams, which occur often in real life finance problems. These are:

• Perpetuity: a fixed payment each year forever
• Cash flows growing at a constant rate: payments increasing at a constant rate each year forever
• Annuity: a fixed payment each year for a limited number of years

The chapter also explains the difference between compound interest and simple interest and the effect of different compounding intervals.

Present value calculations can be done in several ways: using the basic formulas, using the tables given in the text, using business calculators or using computer spreadsheet software like Excel. We provide solutions using both the tables and a popular business calculator (BA II Plus).