Chapter_06 - 6 Discounted Cash Flow Valuation Multiple cash...

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6 6 Discounted Cash Flow Valuation
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6-2 Multiple cash flows Multiple cash flows In Chapter 5, we solved problems with a single cash flow. Most investments have multiple and/or uneven cash flows. This chapter focuses on techniques used to solve such problems. The cash flow (CF) function on your calculator will be heavily used in this chapter.
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6-3 Multiple Cash Flows-FV Multiple Cash Flows-FV 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 Year 0 CF: 2 N; -500 PV; 9 I/Y; CPT FV = 594.05 Year 1 CF: 1 N; -600 PV; 9 I/Y; CPT FV = 654.00 Total FV = 594.05 + 654.00 = 1248.05 Sometimes, doing the arithmetic is quicker than using the function keys.
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6-4 Multiple Cash Flows – Continued Multiple Cash Flows – 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 Year 0 CF: 5 N; -500 PV; 9 I/Y; CPT FV = 769.31 Year 1 CF: 4 N; -600 PV; 9 I/Y; CPT FV = 846.95 Total FV = 769.31 + 846.95 = 1616.26 Second way – use value at year 2: FV = 1248.05(1.09) 3 = 1616.26 3 N; -1248.05 PV; 9 I/Y; CPT FV = 1616.26
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6-5 Multiple Cash Flows – PV Multiple Cash Flows – PV 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 N = 1; I/Y = 10; FV = 1000; CPT PV = -909.09 PV = 2000 / (1.1) 2 = 1652.89 N = 2; I/Y = 10; FV = 2000; CPT PV = -1652.89 PV = 3000 / (1.1) 3 = 2253.94 N = 3; I/Y = 10; FV = 3000; CPT PV = -2253.94 PV = 909.09 + 1652.89 + 2253.94 = 4815.92
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6-6 Multiple Uneven Cash Flows – Multiple Uneven Cash Flows – Using the Calculator Using the Calculator Another way to use the financial calculator for uneven cash flows is to use the cash flow keys Press CF and enter the cash flows beginning with year 0 (CFo). 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 <2 nd > and then <CE|C>
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6-7 Multiple Cash Flows – PV Multiple Cash Flows – PV 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? Leave CF0 blank. This is the value you want to solve
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This note was uploaded on 09/09/2008 for the course H ADM 225 taught by Professor Jwellman during the Fall '07 term at Cornell University (Engineering School).

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Chapter_06 - 6 Discounted Cash Flow Valuation Multiple cash...

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