Chap006 - Chapter 6 Discounted Cash Flow Valuation using M...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 6 Discounted Cash Flow Valuation using Multiple Cash Flows
Background image of page 1

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

View Full DocumentRight Arrow Icon
Example of Multiple Cash Flows You are considering an investment that will pay you $1000 per year for 3 years. If you want to earn 10% on your money, how much would you be willing to pay? We could deal with each cash flow individually: PV = 1000 / (1.1) 1 = 909.09 N = 1; I/Y = 10; FV = 1000; CPT PV = -909.09 PV = 1000 / (1.1) 2 = 826.45 N = 2; I/Y = 10; FV = 1000; CPT PV = -826.45 PV = 1000 / (1.1) 3 = 751.31 N = 3; I/Y = 10; FV = 1000; CPT PV = -751.31 PV = 909.09 + 826.45 + 751.31 = 2,486.85 We can keep doing this with more and more cash flows, but it quickly gets tedious.
Background image of page 2
3 types of multiple cash flow streams Annuity: cash flows are all the same amount, and spread out equally over a finite period of time. $1000 per year for 5 years, e.g. We can handle annuities using the Time Value of Money keys on the BA-II Plus, specifically the PMT key. Perpetuity: cash flows are same amount, over regular intervals, but forever. Two perpetuity formulas. Multiple, uneven cash flows: use the cash flow (CF) function
Background image of page 3

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

View Full DocumentRight Arrow Icon
Ordinary Annuity versus Annuity Due If the first payment occurs at the end of the period, it is called an ordinary annuity We assume all problems are solved in this way unless told otherwise; default calculator setting If the first payment occurs at the beginning of the period, it is called an annuity due
Background image of page 4
Annuities and Perpetuities Basic Formulas Perpetuity: PV = C / r Ordinary Annuities: [ ] [ ] periods. of number the is t and rate interest the is r flow, cash annuity the is C where 1 FVIF 1 ) 1 ( r PVIF 1 ) 1 ( 1 1 , , - = = - + = - = = + - = r C FVIFA C r r C FVA C PVIFA C r r C PVA t r t t r t
Background image of page 5

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

View Full DocumentRight Arrow Icon
Annuity Notation The term in brackets is sometimes called the PVIFA— Present Value Interest Factor for Annuities, and written as PVIFA(r,t). Think of it as the present value of $1 each period discounted back to t=0 at a rate r. Example: The present value of $500 per year for three years if r=10% is: I will not use the PVIFA notation in class, but the solutions manual uses it occasionally. $1387.55 3) , 04 (. * 500 04 . ) 04 . 1 ( 1 1 500 3 = = + - PVIFA
Background image of page 6
Annuities and the Calculator You can use the PMT key on the calculator for the annuity payment The sign convention still holds Ordinary annuity versus annuity due You can switch your calculator between the two types by hitting <2 nd > <PMT>, then <2 nd > <ENTER> on the TI BA-II Plus If you see “BGN” in the upper right corner of your calculator display, you have it set for an annuity due Don’t forget to switch back to “END” when finished by repeating the above process.
Background image of page 7

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

View Full DocumentRight Arrow Icon
Annuity – Using the PMT key Going back to the previous example:
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 35

Chap006 - Chapter 6 Discounted Cash Flow Valuation using M...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online