This
** preview**
has intentionally

**sections.**

*blurred***to view the full version.**

*Sign up**This preview shows
pages
1–3. Sign up
to
view the full content.*

6.1:
•
CALCULATING FV OF MULTIPLE CASH FLOWS
o
The Timeline
– Compound the accumulated balance forward one year at a time
____ 0 _____ 1 _____ 2 _____
•
Year 0 value is $100 and a $100 deposit is made every year
o
Interest rate is 8%
•
Year 1 value is $100 x 1.08 = $108.00
•
Year 2 value is $100 + ($108 x 1.08) = $224.64
o
Quicker Way
– Calculate the FV of each cash flow first and then add them up
First Deposit:
$100 x 1.08
2
= $100 x 1.1664 = $116.64
Second Deposit:
$100 x 1.08 = $108
Total FV is: $116.64 + $108 = $224.64
•
CALCULATING THE PV OF MULTIPLE CASH FLOWS
o
Discount back one period at a time using a time line (See page 149)
o
Calculate the PVs individually and then add them up
The PV of $2,000 in two years at 9% is:
•
$2,000 / 1.09
2
= $1,683.36
The PV of $1,000 in one year at 9% is:
•
$1,000 / 1.09 = $917.43
Therefore the total PV is $1,683.36 + $917.43 = $2,600.79
o
CALCULATOR
(page 150)
Solve for PV
•
Enter the number of periods (N) = 1
•
Enter the I/YR
•
Enter the FV
•
Solve for PV
Discount the individual cash flows one at a time using the same technique we used for the
previous chapter but with a shortcut.
The financial calculator has a memory so you don’t
need to write each calculation down
Solving for the 2
nd
period
•
Enter the number of periods (N) = 2
•
Enter the FV
•
Solve for PV
•
Then you save this number by adding it to the one you saved in your first calculation
o
SPREADSHEET STRATEGIES
See file that I created with cell formula calculations
6.2:
VALUING LEVEL CASH FLOWS ~ ANNUITIES & PERPETUITIES

This
** preview**
has intentionally

ANNUITY:
A level stream of cash flows for a fixed period of time (occurring at the end of each
period)
•
PV for ANNUITY CASH FLOWS
ANNUITY PV = C * [(1 – PV Factor)/r]
•
C = dollars per period
•
r = rate of return
ANNUITY PV = C * {1-[1/(1+r)
t
] / r}
This works because the cash flows of an annuity are all the same.
So this is a handy
variation of the basic PV equation
The term in parenthesis [1/(1+r)
t
], is sometimes called the PV Interest Factor for
annuities.
To calculate the Annuity PV, you first calculate the Annuity PV Factor and then times it
by C
CALCULATOR:
•
Enter N, Enter I/YR, Enter PMT, Solve for PV
•
NOTE:
We enter the annuity cash flow using the PMT key & we do not enter
anything for FV
You can also see Table A.3 in the Appendix (page A-6)
Spreadsheet
•
FINDING THE PAYMENT
Suppose you wish to start up a new business and you need to borrow $100,000.
You
propose to pay off the loan by making 5 equal annual payments.
If the interest rate is
18%, what will the payment be?
•
CALCULATOR

This is the end of the preview. Sign up
to
access the rest of the document.

Ask a homework question
- tutors are online