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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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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
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View Full Document 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 (yearend)
4
5
Annuity
•
Finite series of equal payments that occur at regular intervals.

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PV
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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.
 Spring '10
 ProfessorNg

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