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

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 5 Discounted Cash Flow Valuation Issues: Valuation of Multiple Cash Flows Valuation of Level Cash Flows Understanding how interest rates are quoted
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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%?
Background image of page 2
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 + =
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 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
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Annuity Example 1
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 20

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

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online