lecture05s[1]

lecture05s[1] - Discounted Cash Flow Valuation 1 Agenda...

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Discounted Cash Flow Valuation 1
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Agenda Applications for Future and Present Values of Multiple Cash Flows Valuing Level Cash Flows: Annuities and Perpetuities NPV Rule Valuing Growing Cash Flows 2
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Multiple Cash Flows We can compare cash flows from different periods as long as we discount them to the same point in time. Investments and cash outflows are negative. Profits, income and cash inflows are positive. Adding up all Discounted Cash Flows including the time-zero investment gives us the Net Present Value (NPV). 3
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Investment with Multiple Cash Flows Suppose you invest $1,000 in a mutual fund today and $1,500 in one year. If the fund pays 10% annually, how much will you have in two years? How much will you have in 5 years if you make no further deposits? 4
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Valuation of an Investment You are considering an investment in a 3-year license to operate a hot dog stand. You expect profits to be $100,000 in one year, $150,000 in two years and $250,000 in three years. If you want to earn 15% on your money, how much would you be willing to pay for the license? 5
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Valuation of an Investment – Cont. If the payment for the license is due only one year from now. How much will you be willing to pay? 6
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Using the Calculator We can use the financial calculator for uneven cash flows: Press CF and enter the cash flows beginning with year 0. You have to press the “Enter” key for each cash flow Use the down arrow key to move to the next cash flow The “F” is the number of times a given cash flow occurs in consecutive periods Use the NPV key to compute the present value by entering the interest rate for I, pressing the down arrow and then compute Clear the cash flow keys by pressing CF and then CLR Work Redo the Valuation question using the calculator. 7
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NPV Rule We would like to make an investment only if it has a positive NPV. Why would an investment have a negative NPV?
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lecture05s[1] - Discounted Cash Flow Valuation 1 Agenda...

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