chapter5a

# Chapter5a - Chapter 5 Discounted Cash Flow Valuation Issues Valuation of Multiple Cash Flows Valuation of Level Cash Flows Understanding how

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Chapter 5 Discounted Cash Flow Valuation Issues: Valuation of Multiple Cash Flows Valuation of Level Cash Flows Understanding how interest rates are quoted

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2 Future Value of Multiple Cash Flows Example 1 : 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? Example 1 (continued) : how much will you have in 5 years if you make no further deposits? Example 2: suppose you plan to deposit \$100 into an account in one year and \$300 into the account in three years. How much will be in the account in five years if the interest rate is 8%?
3 Present Value of Multiple Cash Flows Present Value of multiple cash flows is: PV = Example 1 : you are offered an investment that will pay you \$200 in one year, \$400 the next year, \$600 the next year, and \$800 at the end of next year. You can earn 12 percent on very similar investments. What is the most you should pay for this one? Year 1 CF: \$200 / (1.12) 1 = \$178.57 Year 2 CF: \$400 / (1.12) 2 = \$318.88 Year 3 CF: \$600 / (1.12) 3 = \$427.07 Year 4 CF: \$800 / (1.12) 4 = \$508.41 Total PV = \$178.57 + 318.88 + 427.07 + 508.41 = \$1,432.93 i r i C T i ) 1 ( 1 + =

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Valuing Level Cash flows Present value calculations can be very complicated – often need to use a spreadsheet or financial calculator --complicated cash flow patterns --different discount rates for different cash flows Level cash flows: some special cases that are relatively easy and/or common (see below) Always treat today as date 0 and assume all annual cash flows arrive at annual intervals (year-end) 4
5 Annuity Finite series of equal payments that occur at regular intervals. - + = + - = r r C FV r r C PV t t 1 ) 1 ( ) 1 ( 1 1 0 1 C 2 C 3 C T C

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6 Annuity Example 1
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## This note was uploaded on 06/20/2010 for the course CB EF4441 taught by Professor Professorng during the Spring '10 term at 東京国際大学.

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Chapter5a - Chapter 5 Discounted Cash Flow Valuation Issues Valuation of Multiple Cash Flows Valuation of Level Cash Flows Understanding how

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