IF Discounted Cash Flow Valuation - Lecture

# IF Discounted Cash - MehmetYalin2008 Chapter 5 Introduction to Valuation The Time Value of Money MehmetYalin2008 20032009MehmetYalin Chapter5 22

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Click to edit Master subtitle style  10/16/09  Mehmet Yalin © 2008

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10/16/09  Mehmet Yalin © 2008 Chapter 5 ± Introduction to Valuation: The Time Value of Money  Chapter 5  © 2003-2009 Mehmet Yalin 22
10/16/09  Mehmet Yalin © 2008 basic concepts v Discounted cash flow ( DCF ) valuation : Determining the present value of a future cash flow v Present value ( PV ) : Value of a cash flow earlier in time v Future value ( FV ) : Value of a cash flow later in time v Interest rate ( R ) : Exchange rate between “present value” and “future value,” i.e. “the price of money” - opportunity cost - (appropriate) discount rate - yield to maturity (YTM) - required rate of return  © 2003-2009 Mehmet Yalin 33  Chapter 5

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10/16/09  Mehmet Yalin © 2008 example on future value How much will you have in one year if you invest \$10,000 today at an annual interest rate of 5%? How about in two years?  © 2003-2009 Mehmet Yalin 44 ( 29 500 , 10 \$ 05 . 0 1 000 , 10 \$ 1 = + × = FV ( 29 ( 29 ( 29 025 , 11 \$ 05 . 0 1 000 , 10 \$ OR 025 , 11 \$ 05 . 0 1 500 , 10 \$ 500 , 10 \$ 05 . 0 1 000 , 10 \$ 2 2 2 1 = + × = = + × = = + × = FV FV FV  Chapter 5
10/16/09  Mehmet Yalin © 2008 example on present value How much will you need to invest today in order to have \$11,025 in two years if you can earn 5% interest annually?  © 2003-2009 Mehmet Yalin 55 ( 29 ( 29 ( 29 000 , 10 \$ 05 . 0 1 025 , 11 \$ OR 000 , 10 \$ 05 . 0 1 500 , 10 \$ 500 , 10 \$ 05 . 0 1 500 , 10 \$ 05 . 0 1 025 , 11 \$ 025 , 11 \$ 05 . 0 1 2 0 0 0 1 1 = + = = + = = + × = + = = + × PV PV PV PV PV ( 29 ( 29 t t R FV PV R PV FV + = + × = 1 OR 1  Chapter 5

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10/16/09  Mehmet Yalin © 2008 example on interest Let’s go back to the case, in which we are investing \$10,000 today for two years at 5% annual interest rate. How about if the investment is for 50 years?  © 2003-2009 Mehmet Yalin 66 ( 29 25 \$ 000 , 1 \$ 000 , 10 \$ 025 , 11 \$ g compoundin to due Interest 000 , 1 \$ 2 05 . 0 000 , 10 \$ interest Simple 000 , 10 \$ Principal 025 , 11 \$ 05 . 0 1 000 , 10 \$ 2 2 = - - = = × × = = = + × = FV Money makes money and the money that money makes makes more money. Benjamin Franklin ( 29 674 , 79 \$ 000 , 25 \$ 000 , 10 \$ 674 , 114 \$ g compoundin to due Interest 000 , 25 \$ 50 05 . 0 000 , 10 \$ interest Simple 000 , 10 \$ Principal 674 , 114 \$ 05 . 0 1 000 , 10 \$ 50 50 = - - = = × × = = = + × = FV  Chapter 5
10/16/09  Mehmet Yalin © 2008 additional example 1 You have \$500,000 which can earn 5% per year. Will you have enough money to buy an \$800,000 condo in Manhattan in 10 years?

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## This note was uploaded on 10/16/2009 for the course BUSFIN 1030 taught by Professor Zutter during the Fall '08 term at Pittsburgh.

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IF Discounted Cash - MehmetYalin2008 Chapter 5 Introduction to Valuation The Time Value of Money MehmetYalin2008 20032009MehmetYalin Chapter5 22

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