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Present value

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  1. Present value

  2. Character The rice is so soft ~ 1 ) Nicholas Tse Assume that he is a wealth maximizer , he will choose a girlfriend that can generate the highest future income .

  3. 2) Faye Wong A divorced woman with a 6-year-old daughter ,Tong Tong. Her annual income will be 2 million per year

  4. 3) Cecilia Cheung Famous Single- singer, as she is less famous now , her annual income will be 1 million per year .

  5. I will choose the one who can earn more $$ Relationship

  6. Assume that Nicholas will choose the one who will generate more future income ,and he will be with the girl for 10 years . Now ,we discount the future income of Cecilia and Faye into present value first .Interest rate :10% /year

  7. Present value of receiving a constant amount at the end of each year for finite number of years . Y Y Y Y ————+ ——— + ——— + ……… ——— (1+r)¹ (1+r)² (1+r)³ (1+r)ⁿ Y 1 = ———[ 1 ― ————] r(1+r)ⁿ * n = time (number of year)

  8. Cecilia will earn 1 million per year , and she will work for 10 years. So the present value of her future income is : 1 million 1 ——————[ 1 ─ ——————] = $6144567 10% (1+10 %)¹º

  9. Faye Wong will earn 2 million per year ,and she will work for 10 years. So the present value of her future income is : 2 million 1 ───── [ 1 −——————] = $12289134 10% (1+10 %)¹º

  10. Mum , We have a happy family again ~

  11. Wait ~ Honey ~ Don’t forget she has a daughter !!! Dad ~

  12. But there is a point that Faye has a daughter, Tong Tong and she will spend Faye’s income. • Tong Tong will spend $ 1200000 per year , and she will spend Faye’s income for 10 years.

  13. So , as Tong Tong will spend $1200000 /year ,the present value of Faye´s future income will decrease 2 million 1 ───── [ 1 ─ ───── ] - Tong Tong’s expenditure 10% (1+10 %)¹º 2 million 1 $1200 000 1 = ───── [ 1 − ────── ] − ────── [ 1 − ───── ] 10% (1+10 %)¹º 10% (1+10 %)¹º =$12289134 −$7373480 =$ 4915654

  14. And Cecilia’s future income ( in terms of present value) remains constant = $6144567 But Faye’s future income( in terms of present value ) decreases =$ 4915654 So Nicholas will choose Cecilia now ~

  15. I win ~ Fung Fung I love You!! I love You too , Cecilia ~because you got more money …HaHa

  16. We will go back to Beijing ~ Sorry , Mum

  17. The End By Irene (10) & Cecilia (17)