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Unformatted text preview: Click to edit Master title style 10/25/11 1 10/25/11 Chapter 6 Discounted Cash Flow Valuation Formulas Click to edit Master title style 10/25/11 2 10/25/11 Key Concepts and Skills Be able to compute the future value of multiple cash flows Be able to compute the present value of multiple cash flows Be able to compute loan payments Be able to find the interest rate on a loan Understand how interest rates are quoted Understand how loans are amortized or paid off Click to edit Master title style 10/25/11 3 10/25/11 You think you will be able to deposit $4,000 at the end of each of the next three years in a bank account paying 8 percent interest. You currently have $7,000 in the account. How much will you have in three years? In four years? Multiple Cash Flows Future Value Example 6.1 Click to edit Master title style 10/25/11 4 10/25/11 Multiple Cash Flows Future Value Example 6.1 Find the value at year 3 of each cash flow and add them together Today (year 0): FV = 7000(1.08) 3 = 8,817.98 Year 1: FV = 4,000(1.08) 2 = 4,665.60 Year 2: FV = 4,000(1.08) = 4,320 Year 3: value = 4,000 Total value in 3 years = 8,817.98 + 4,665.60 + 4,320 + 4,000 = 21,803.58 Value at year 4 = 21,803.58(1.08) = 23,547.87 Click to edit Master title style 10/25/11 5 10/25/11 Multiple Cash Flows Future Value Example 6.1 Calculator: Today (year 0 CF): 3 N; 8 I/Y; 7,000 PV; CPT FV = 8,817.98 Year 1 CF: 2 N; 8 I/Y; 4000 PV; CPT FV = 4,665.60 Year 2 CF: 1 N; 8 I/Y; 4000 PV; CPT FV = 4,320 Year 3 CF: value = 4,000 Total value in 3 years = 8817.98 + 4665.60 + 4320 + 4000 = 21,803.58 Value at year 4: 1 N; 8 I/Y; 21803.58 PV; CPT FV = 23,547.87 Click to edit Master title style 10/25/11 6 10/25/11 Multiple Cash Flows FV Example 2 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) = 1,248.05 Calculator: Year 0 CF: 2 N; 500 PV; 9 I/Y; CPT FV = 594.05 Year 1 CF: 1 N; 600 PV; 9 I/Y; CPT FV = 654.00 Total FV = 594.05 + 654.00 = 1,248.05 Click to edit Master title style 10/25/11 7 10/25/11 Multiple Cash Flows Example 2 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 = 1,616.26 Second way use value at year 2: FV = 1,248.05(1.09) 3 = 1,616.26 Click to edit Master title style 10/25/11 8 10/25/11 Multiple Cash Flows Example 2 Continued Calculator: First way: Year 0 CF: 5 N; 500 PV; 9 I/Y; CPT FV = 769.31 Year 1 CF: 4 N; 600 PV; 9 I/Y; CPT FV = 846.95 Total FV = 769.31 + 846.95 = 1,616.26 Second way use value at year 2: 3 N; 1,248.05 PV; 9 I/Y; CPT FV = 1,616.26 Click to edit Master title style 10/25/11 9 10/25/11 Multiple Cash Flows FV Example 3 Suppose you plan to deposit $100 into an account in one year and $300 into the...
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This note was uploaded on 10/25/2011 for the course FI 311 taught by Professor Booth during the Fall '06 term at Michigan State University.
 Fall '06
 Booth
 Future Value, Valuation

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