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Chap6-7-9-Test-Cheat-Sheet

# Chap6-7-9-Test-Cheat-Sheet - CHAPTER 6 7 9 TEST CHEAT SHEET...

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CHAPTER 6, 7, & 9 - TEST CHEAT SHEET CHAPTER 6, 7, & 9 - TEST CHEAT SHEET 6.1: FUTURE & PRESENT VALUES of MULTIPLE CASH FLOWS 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 o N = 5, I = 18, PV = \$100,000, solve for PMT Annuity PV = C * [(1 - PV Factor)/r]
FINDING THE NUMBER OF PAYMENTS Example: You charged \$1,000 to your credit card. You can only afford the minimum payment of \$20 per month. The interest rate on the credit card is 1.5% per month for some unknown length of time. How long will it take you to pay off the \$1,000?

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