Chap006sForms

Chap006sForms - Discounted Cash Flow Valuation Chapter Six...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Discounted Cash Flow Valuation Chapter Six Multiple Cash Flows – FV Example 1 • Suppose you invest $500 in a mutual fund today and $600 in one year. If the fund pays 9% annually, how much will you have in two years? FV = 500(1.09) 2 + 600(1.09) = 1248.05 Multiple Cash Flows – Example 1 Continued • How much will you have in 5 years if you make no further deposits? • First way: FV = 500(1.09) 5 + 600(1.09) 4 = 1616.26 • Second way – use value at year 2: FV = 1248.05(1.09) 3 = 1616.26 Multiple Cash Flows – FV Example 2 • Suppose you plan to deposit $100 into an account in one year and $300 into the account in three years. How much will be in the account in five years if the interest rate is 8%? FV = 100(1.08) 4 + 300(1.08) 2 = 136.05 + 349.92 = 485.97 Multiple Cash Flows – PV Example • You are considering an investment that will pay you $1000 in one year, $2000 in two years and $3000 in three years. If you want to earn 10% on your money, how much would you be willing to pay? – PV = 1000 / (1.1) 1 = 909.09 – PV = 2000 / (1.1) 2 = 1652.89 – PV = 3000 / (1.1) 3 = 2253.94 – PV = 909.09 + 1652.89 + 2253.94 = 4815.93 Multiple Uneven Cash Flows – Using the Calculator • Another way to use the financial calculator for uneven cash flows is to use the cash flow keys – Texas Instruments BA-II Plus • 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 years • 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 Decisions, Decisions • Your broker calls you and tells you that he has this great investment opportunity. If you invest $100 today, you will receive $40 in one year and $75 in two years. If you require a 15% return on investments of this risk, should you take the investment? – Use the CF keys to compute the value of the investment • CF; CF = 0; C01 = 40; F01 = 1; C02 = 75; F02 = 1 • NPV; I = 15; CPT NPV = 91.49 – No – the broker is charging more than you would be willing to pay. Annuities and Perpetuities Defined • Annuity – finite series of equal payments that occur at regular intervals – If the first payment occurs at the end of the period, it is called an ordinary annuity – If the first payment occurs at the beginning of the period, it is called an annuity due • Perpetuity – infinite series of equal payments Annuities and Perpetuities –...
View Full Document

This note was uploaded on 04/05/2009 for the course BUAD 306 taught by Professor Selvili during the Fall '07 term at USC.

Page1 / 33

Chap006sForms - Discounted Cash Flow Valuation Chapter Six...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online