lecture06s[1] - Discounted Cash Flow Valuation 1 Agenda...

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Discounted Cash Flow Valuation 1
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Agenda Continue Annuities and Perpetuities Growing Annuities and Perpetuities Comparing Rates: The Effect of Compounding Loan Types and Loan Amortization 2
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Finding the Rate Your friend wants to borrow $2,000 from you and promises to repay you $500 every year for 5 years. Is this a good deal? If the discount rate is 8% what is the NPV? -2,000+(500/0.08)*[1-1/(1.08) 5 ]=-3.64 If the discount rate is 7% what is the NPV? N=5, I/Y=7, PMT=500, CPT PV=2050.10 NPV=50.10 At what rate is it a ‘fair’ deal? N=5, PMT=500, PV=-2000, CPT I/Y=7.93%
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Saving for College Ann wants to save for her newborn daughter’s college education. Tuition costs will be $30,000 per year starting 18 years from now. If she makes annual deposits 17 years and the interest rate is 14% how much does she have to deposit every year? 4
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Annuity Due You stand to receive payments for a new consulting job. You will receive $100,000 per year for 4 years. The first payment is made today . If the discount rate is 8%, what is the present value of your compensation? 5
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Growing Annuity Cash flows in business are likely to grow over time, due to real growth or inflation. A growing annuity is an annuity with payments that grow over time. The payments are: C, C(1+g), C(1+g) 2 , … PV=C/(1+r)+ C(1+g)/(1+r) 2 + +C(1+g) 2 /(1+r) 3 +… PV=C[1-((1+g)/(1+r)) t ]/(r-g)
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Growing Annuity Stuart has been offered a job that will pay him $80,000 one year from now. Subsequent to that his salary will increase by 9% until his retirement in 40 years. What is the PV of his lifetime salary at a 20% discount rate.
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Growing Perpetuity A growing annuity that last forever is a
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