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Unformatted text preview: Discounted Cash Flow Valuation Chapter Six Chapter Outline • Future and Present Values of Multiple Cash Flows • Valuing Level Cash Flows: Annuities and Perpetuities • Comparing Rates: The Effect of Compounding Periods • Loan Types and Loan Amortization Multiple CFs – FV Example 1 • Find the value at year 3 of each cash flow and add them together. FV = 7000(1.08)^3= 8,817.984 FV = 4,000(1.08)^2=4665.6000 FV = 5,000(1.08)=5,400,000 FV = 2,000 Total value in 3 years FV = ? FV = 20,883.584 Multiple CFs – FV Example 2 • Suppose you invest $500 in a mutual fund today and $600 in one year, and $700 in three years. If the fund pays 9% annually, how much will you have in four years? FV = 500(1.09)^4=705.7908 FV = 600(1.09)^3=777.01 FV = 700((1.09)=763 FV=2245.808205 Multiple CFs – FV Example 2 • How much will you have in 40 years if you make no further deposits? FV = 2245.808205(1.09)^36=49971.98375 ( same as 2245.808205 given same interest rate Multiple CFs – FV Example 1 • Find the value at year 3 of each cash flow and add them together. 8% per year is the cost of capital. Today (year 0): 7000 Year 1: 4,000 Year 2: 5,000 Year 3: 2,000 Multiple CFs – PV Example 1 • Find the PV of each cash flows and add them up. Your required return is 12% annually. Year 1: 200/(1.12)=178.5714286 Year 2: 400/(1.12)^2= 318.8775510 Year 3: 600/(1.12)^3=427.0681487 Year 4: 800(1.12)^4=508.4144627 Total PV=1432.931591 Multiple Uneven Cash Flows Texas Instruments BAII Plus Can use the cash flow key for uneven cash flows. 1. CF and enter the cash flows beginning with year 0 2. Enter key after each cash flow 3. Use the down arrow key to move to the next cash flow 4. “F” is the number of times a given cash flow occurs in consecutive years 5. Use the NPV key to compute the present value by entering the interest rate for I, pressing the down arrow and then compute 6. Clear the cash flow keys by pressing CF and then 2 nd [ CLR Work ] Multiple CFs – PV Example 2 • You are offered an investment that costs $5000. It will pay you $1000 in one year, $2000 in two years and $3000 in three years. If you want to earn 10% on your money should you do it? PV = 1000/(1.1)=909.090909 PV = 2000/(1.1)^2=1652.892562 PV = 3000/(1.1)^3=2253.944403 PV = 4815.927874 Multiple CFs – PV Example 2 Using the CF keys, CF , 2 nd [ CLR WORK ] CF0 = 0 ” C01 = 1000 ENTER ” F01 = 1 ” C02 = 2000 ENTER ” F02 = 1 ” C03 = 3000 ENTER ” F03 = 1 NPV , I = 10 ENTER ” CPT NPV = Multiple CFs – PV & FV Example 1 • Suppose you are looking at the following possible cash flows: Year 1 CF = $100; Years 2 and 3 CFs = $200; nothing in Year 4, Year 5 CF = $100. The required discount rate is 7%....
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This note was uploaded on 06/05/2011 for the course FINA 3000 taught by Professor Laplante during the Spring '08 term at UGA.
 Spring '08
 LAPLANTE
 Compounding, Corporate Finance, Valuation

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