Chapter 6: Discounted Cash Flow
Valuation
Future and Present Values of Multiple Cash Flows
Future Value with Multiple Cash Flows

Figure 6.1

Example 6.1

There are 2 ways to calculate future values for multiple cash flows:
o
Compound the accumulated balance forward one year at the time
o
Calculate the future value of each cash flow first and then add them up
o
Figure 6.2
o
Figure 6.3
o
Figure 6.4
o
Example 6.2
Present Value with Multiple Cash Flows

We can either:
o
Discount back one period at a time
o
Calculate the present values individually and add them up

Present value of a series of future cash flows is simply the amount you would
need today to exactly duplicate those future cash flows (for a given discount
rate)

Figure 6.5
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Figure 6.6

Example 6.3

Example 6.4
A Note about Cash Flow Timing

In working present and future value problems, cash flow timing is critically
important

In almost all such calculations, it is implicitly assumed that the cash flows
occur at the end of each period

Unless told otherwise, you should always assume that this is what is meant
Valuing Level Cash Flows: Annuities and Perpetuities

Annuity
 a level stream of cash flows for a fixed period of time
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 Spring '09
 Annual Percentage Rate, Future Value, Valuation, Mortgage loan, cash f lows

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