# FIN301_Ch5 - Chapter 5 Discounted Cash Flow Valuation...

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Chapter 5 Discounted Cash Flow Valuation

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2 Chapter Outline Future and Present Values of Multiple Cash Flows Valuing Level Cash Flows: Annuities and Perpetuities Comparing Rates: The Effect of Compounding Periods Loan Types and Loan Amortization
3 FV and PV of Multiple Cash Flows You are considering an investment that will pay you \$1,000 in one year, \$2,000 in two years and \$3,000 in three years. If you want to earn 10% on your money, how much would you be willing to pay? What will be the value of the investment in three years? Suppose you are looking at the following possible cash flows: Year 1 CF = \$100; Years 2 and 3 CFs = \$200; Years 4 and 5 CFs = \$300. The required discount rate is 7%. What is the value of the cash flows at year 5? What is the value of the cash flows today?

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4 Annuities  (1) 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
5 Annuities (2) Perpetuity: PV = C / r Annuities: - + = + - = r r C FV r r C PV t t 1 ) 1 ( ) 1 ( 1 1

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6 Annuities (3) You have determined that you can afford to pay \$632 per month toward a new sport car. You call up your local bank and find out that the going rate is 1% per month for 48 months. How much can you borrow? Suppose you win the Publishers Clearinghouse \$10 million sweepstakes. The money is paid in equal annual installments of \$333,333.33 over 30 years. If the appropriate discount rate is 5%, how much is the sweepstakes actually worth today?
7 Annuities  (4) You know the payment amount for a loan and you want to know how much was borrowed. Do you compute a present value or a future value? You want to receive 5,000 per month in retirement.

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## This note was uploaded on 05/06/2008 for the course FIN 301 taught by Professor Andelin,stevenle during the Spring '07 term at Pennsylvania State University, University Park.

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FIN301_Ch5 - Chapter 5 Discounted Cash Flow Valuation...

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