Chapter 6 Notes

Chapter 6 Notes - Chapter 6: Discounted Cash Flow Valuation...

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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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Chapter 6 Notes - Chapter 6: Discounted Cash Flow Valuation...

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