Chap6-7-9-Test-Cheat-Sheet

Chap6-7-9-Test-Cheat-Sheet - CHAPTER 6, 7, & 9 - TEST...

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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
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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
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Chap6-7-9-Test-Cheat-Sheet - CHAPTER 6, 7, & 9 - TEST...

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