Discounted Cash Flow Valuation

Discounted Cash Flow Valuation - Discounted Cash Flow...

This preview shows pages 1–11. Sign up to view the full content.

Discounted Cash Flow Valuation

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Outline Do you remember? How to calculate present value, future value, interest rate, with and without calculator. Net Present Value Perpetuities and Annuities
1 The One-Period Case: Future Value The total amount due at the end of an investment is called the Future Value ( FV ). In the one-period case, the formula for FV can be written as: FV = PV ×(1 + r ) Where PV (present value) is the cash flow today (time zero) and r is the appropriate interest rate.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
1 The One-Period Case: Future Value Example: If you invest \$10,000 at 5% annual interest, how much will your investment grow in 1 year? \$10,000 is the principal repayment (\$10,000 × 1) \$500 is the interest (\$10,000 × .05) \$10,500 is the total due. It can be calculated as: \$10,000×(1.05) = \$10,500 = FV
1 The One-Period Case: Present Value In the one-period case, the formula for the present value PV can be written as: r FV PV + = 1 Where FV (future value) is the cash flow at date 1 and r is the appropriate interest rate.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
1 The One-Period Case: Present Value If you make \$10,000 in one year when interest rates are at 5%, how much is your investment worth today? 81 . 523 , 9 \$ 05 . 1 000 , 10 \$ = The amount that a borrower would need to set aside today to to able to meet the promised payment of \$10,000 in one year is call the Present Value (PV) of \$10,000. Note that \$9,523.81×(1.05) = \$10,000 = + = r FV PV 1
Net Present Value The Net Present Value ( NPV ) of an investment is the present value of the expected cash flows, less the cost of the investment. In the one-period case, the formula for NPV can be written as: NPV = – Cost + PV Example : Suppose an investment that promises to pay \$10,000 in one year is offered for sale for \$9,500. Your interest rate is 5% (the interest you get by putting the money in the bank instead of buying the investment). Should you buy?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
1 The One-Period Case: Net Present Value If we did not undertake the positive NPV project, and instead invested our \$9,500 in the bank at 5 %, our FV would be less than \$10,000 and we would be worse off: \$9,500×(1.05) = \$9,975 < \$10,000. 81 . 23 \$ 81 . 523 , 9 \$ 500 , 9 \$ 05 . 1 000 , 10 \$ 500 , 9 \$ = + - = + - = NPV NPV NPV Yes!
2 The Multiperiod Case: Future Value The general formula for the future value of an investment over many periods can be written as: FV = PV ×(1 + r ) T Where PV is the cash flow at date 0, r is the appropriate interest rate T is the number of periods over which the cash is invested.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Future Value Example: Suppose that Jay Ritter invested in the Modigliani company. Modigliani pays a current dividend of \$1.10 per year, which is expected to grow at 40 % per year for the next five years. What will the dividend be in five years?
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 50

Discounted Cash Flow Valuation - Discounted Cash Flow...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online