Lecture 3 Discounted Cash Flow.docx - Lecture 3 Discounted Cash Flow The need to discount cash flow No good financial analysis can be done without

# Lecture 3 Discounted Cash Flow.docx - Lecture 3 Discounted...

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Lecture 3 Discounted Cash Flow The need to discount cash flow - No good financial analysis can be done without discounting future cash flows The One-Period case Future Value - The total amount due at the end of the investment FV = C 0 × ( 1 + r ) C 0 is cash flow today (time zero); r is the appropriate interest rate Present Value PV = C 1 1 + r C 1 is the cash flow at date 1; r is the appropriate interest rate (discount rate) - Present value is the discounted future value PV = FV 1 + r FV = PV × ( 1 + r ) At Time 0, present value (investment) – cash outflow At Time 1, future value (receivable) – cash inflow The discount rate - used the bank’s guaranteed interest rate as the ‘discount rate’ Because of opportunity cost: - if we will not invest in the undertaking, we would lend the money to the bank, therefore obtain next year a certain amount of money (the future value of our investment) Using the interest rate to discount future cash flows establishes and implicit comparison between a virtual alternative. Net present value - when you want to calculate the incremental cost or benefit from adopting an investment NPV =− Cost + PV The Multiperiod Case The future value of an investment over many periods: FV = C 0 × ( 1 + r ) T

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• Fall '17
• Prof. Yvan Nezerwe

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