11S.03.Discounted_Cash_Flow_Valuation-student

# 11S.03.Discounted_Cash_Flow_Valuation-student - FIN 600...

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FIN 600 – Lecture 3 Discounted Cash Flow Valuation Dr. Zhipeng (Alan) Yan

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Chapter Outline Time Value of Money Valuation: The One-Period Case The Multiperiod Case Compounding Periods Simplifications What Is a Firm Worth?
Time Value of Money ± A dollar received today is worth more than a dollar received in the future. ± Interest - is the return you receive for investing your money. ± The interest rate is the basis for a test that any proposed investment must pass. ± Example: ² Putting \$100 in the bank ² Earn 6% interest ² After 1 year \$106 \$100 \$106

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Future Values and compound rate Future Value - Amount to which an investment will grow after earning interest. Simple Interest - Interest earned only on the original investment. Compound Interest - Interest earned on interest. - The sooner your money can earn interest, the faster the interest can earn interest.
Future Values Example - Compound Interest Interest earned at a rate of 6% for five years on the previous year’s balance. Interest Earned Per Year =Prior Year Balance x .06

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Example - Compound Interest Interest earned at a rate of 6% for five years on the previous year’s balance. Today Future Years 1 2 3 4 5 Interest Earned Value 100 Future Values 6 106 6.36 112.36 6.74 119.10 7.15 126.25 7.57 133.82 Value at the end of Year 5 = \$133.82
Future Value ± The general formula for the future value of an investment over many periods can be written as: FV = C 0 × (1 + r ) T Where C 0 is cash flow at date 0, r is the appropriate interest rate, and T is the number of periods over which the cash is invested.

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Compounding and the Power of Time - Manhattan Island Sale Peter Minuit bought Manhattan Island for \$24 in 1626.
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11S.03.Discounted_Cash_Flow_Valuation-student - FIN 600...

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