Chapter 4 - Principles of Finance – FIN 3100 Chapter 4...

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Unformatted text preview: Principles of Finance – FIN 3100 Chapter 4 – Time Value of Money – Part 2 1 Patty Robertson A Quick Trip Down Memory Lane FV = PV(1 + r ) t PV = FV / (1 + r ) t 2 Agenda • Determine how the concepts learned to value single cash flows can be used to value multiple cash flows. • Learn how to calculate loan payments and to find the interest rate on a loan. • Understand how loans are amortized. 3 Abbreviations 4 More Abbreviations 5 Multiple Cash Flows • In the previous chapter, we laid the groundwork for discounted cash flow valuation with single cash flows. • Now, we learn how to deal with multiple cash flows, which is more realistic in making financial decisions. ▫ Usually a large cash outflow is followed by an stream of future cash inflows. • From this point forward, we will assume compound interest in all our work. 6 Timelines • Visualizing what is happening is helpful in setting up the problem. • Draw at timeline for the following scenarios: ▫ Deposit $1,000 per year into your savings account for four years, starting now, to save for a house. ▫ Receive lottery winnings of $10,000 a year for five years starting one year from now. ▫ 7 Time Lines • Deposit $1,000 per year into your savings account for four years, starting now , to save for a house. 8 1 2 3 4 $1,000 $1,000 $1,000 $1,000 Time Lines • Receive lottery winnings of $10,000 a year for five years starting one year from now . 9 1 2 3 4 $10,000 $10,000 $10,000 $10,000 $10,000 5 Time Lines • Invest $1,000 toward retirement today and invest twice that amount at the same time every year for five years. 10 1 2 3 4 $1,000 $2,000 $2,000 $2,000 $2,000 $2,000 5 Time Lines • Pay your $500 car payment monthly for one year. ▫ Is this right?? 11 0 1 2 3 4 5 6 7 8 9 10 11 12 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 $500 Multiple Cash Flows - FV • Let’s solve the first one…you deposit $1,000 per year into your savings account for four years, starting now, to save for a house. How much money will you have at the end of four years? ▫ What are we missing?? 12 Multiple Cash Flows - FV 13 r = .08 1 2 3 4 $1,000 $1,000 $1,000 $1,000 • Why can’t we just add the four amounts and grow them at 8% like we did before? • We already know that we can calculate equivalent values for single cash flows in the future. ?? Multiple Cash Flows - FV 14 r = .08 $1,000 $1,000 $1,000 $1,259.71 $1,080.00 $1,166.40 $4,866.60 (rounding) 1 2 3 4 $1,000 $1,360.49 $1,000(1.08)4 $1,000(1.08)3 $1,000(1.08)2 $1,000(1.08)1 ??...
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This document was uploaded on 11/03/2011 for the course FIN 3100 at Kennesaw.

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Chapter 4 - Principles of Finance – FIN 3100 Chapter 4...

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