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Unformatted text preview: Discounted Cash Flow Valuation Chapter Six 1 Multiple Cash Flows – FV Example 1 • Suppose you invest $500 in a mutual fund today and $600 in one year. If the fund pays 9% annually, how much will you have in two years? FV = 500(1.09) 2 + 600(1.09) = 1248.05 2 Multiple Cash Flows – Example 1 Continued • How much will you have in 5 years if you make no further deposits? • First way: FV = 500(1.09) 5 + 600(1.09) 4 = 1616.26 • Second way – use value at year 2: FV = 1248.05(1.09) 3 = 1616.26 3 Multiple Cash Flows – FV Example 2 • Suppose you plan to deposit $100 into an account in one year and $300 into the account in three years. How much will be in the account in five years if the interest rate is 8%? FV = 100(1.08) 4 + 300(1.08) 2 = 136.05 + 349.92 = 485.97 4 Multiple Cash Flows – PV Example • You are considering an investment that 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, how much would you be willing to pay? – PV = 1000 / (1.1) 1 = 909.09 – PV = 2000 / (1.1) 2 = 1652.89 – PV = 3000 / (1.1) 3 = 2253.94 – PV = 909.09 + 1652.89 + 2253.94 = 4815.93 5 Multiple Uneven Cash Flows – Using the Calculator • Another way to use the financial calculator for uneven cash flows is to use the cash flow keys – Texas Instruments BAII Plus • Press CF and enter the cash flows beginning with year 0. • You have to press the “Enter” key for each cash flow • Use the down arrow key to move to the next cash flow • The “F” is the number of times a given cash flow occurs in consecutive years • Use the NPV key to compute the present value by entering the interest rate for I, pressing the down arrow and then compute • Clear the cash flow keys by pressing CF and then CLR Work 6 Decisions, Decisions • Your broker calls you and tells you that he has this great investment opportunity. If you invest $100 today, you will receive $40 in one year and $75 in two years. If you require a 15% return on investments of this risk, should you take the investment? – Use the CF keys to compute the value of the investment • CF; CF = 0; C01 = 40; F01 = 1; C02 = 75; F02 = 1 • NPV; I = 15; CPT NPV = 91.49 – No – the broker is charging more than you would be willing to pay. 7 Annuities and Perpetuities Defined • Annuity – finite series of equal payments that occur at regular intervals – If the first payment occurs at the end of the period, it is called an ordinary annuity – If the first payment occurs at the beginning of the period, it is called an annuity due • Perpetuity – infinite series of equal payments 8 Annuities and Perpetuities –...
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This note was uploaded on 09/12/2011 for the course BUAD 304 at USC.
 '07
 Cummings

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