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...

This preview shows page 1 - 2 out of 5 pages.

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
Image of page 1
Image of page 2

You've reached the end of your free preview.

Want to read all 5 pages?

  • Fall '17
  • Prof. Yvan Nezerwe

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors