Chapter_5_Fall2011_s

Chapter_5_Fall2011_s - Chapter Chapter51 Discounted Cash...

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Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth Chapter 5 Discounted Cash Flow Valuation

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Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth 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
Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth FV of Multiple Cash Flows New car Example (pg. 110) See p. 110 for Problem 1 Period 2011 2012 2013 2014 Tax Refund \$1,200 \$1,600 \$2,000 \$2,500.00 FV #1 \$1,389.15 FV #2 \$1,764.00 FV #3 \$2,100.00 TOTAL FV \$7,753.15

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Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth PV with Multiple Cash Flows Investment Example (pg. 111) See p. 111 for Problem 2. First let’s draw a time line: T0 T1 T2 T3 T4 T5 T6 T7 T8 -10,000 +5,000 +6,000 +6,000 +6,000 -10,000
Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth PV with Multiple Cash Flows Investment Example (pg. 111) cont’d Now, using the cash flow worksheet on our BAII plus: CF0 = -10,000 CF1 = 0 F01 = 2 CF2 = +5,000 F02 = 1 CF3 = 0 F03 = 1 CF4 = -10,000 F04 = 1 CF5 = +6,000 F05 = 3 NPV I = 9.5 NPV CPT -2,981.64 Since the NPV of this investment opportunity is negative we should not invest in this program. Pay attention to the sign of each cash flow

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Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth Present Value of a string of cash flows Waterless Car Wash Example (pg. 112) See p. 112 for Problem 3. Time Period 0 1 2 3 Cash Flow ???? \$5,000 \$5,000 \$10,000 \$4,545.45 5,000*(1/1.1) \$4,132.23 5,000*(1/1.1) 2 \$7,513.15 10,000*(1/1.1) 3 Total PV (\$) = 4,545.45+4,132.23+7,513.15 = \$16,190.83
Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth Annuities and Perpetuities Defined Annuity definition: See upper part of p. 113 Difference between ordinary annuity & annuity due : See lower part of p. 114 Perpetuity definition : See upper part of p. 136.

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Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth Present Value of an Annuity Sabin vs. Wiggins Example (pg. 113) See p. 113 for Problem 4. Period 0 1 2 3 4 5 Payment \$ 10,000.00 \$ 10,000.00 \$ 10,000.00 \$ 10,000.00 \$ 10,000.00 \$ 8,928.60 \$ 7,971.94 \$ 7,117.80 \$ 6,355.18 \$ 5,674.27 \$ 36,047.79
Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth Annuities and Perpetuities – Basic Formulas Perpetuity: PV = C / i Where C = periodic payment Annuities: + = + = i i C FV i i C PV n n 1 ) 1 ( ) 1 ( 1 1

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Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth Annuities and the Calculator You can use the PMT key on the calculator for the equal payment The sign convention still holds Ordinary annuity versus annuity due You can switch your calculator between the two types by using the 2 nd BGN 2 nd Set on the TI BA-II Plus If you see “BGN” or “Begin” in the display of your calculator, you have it set for an annuity due Most problems are ordinary annuities
Chapter 5 Discounted Cash Flow Valuation FI 311 Elizabeth Booth Present Value of an Ordinary Annuity 64-year-old Example (pg. 114) See p. 114 for Problem 5.

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Chapter_5_Fall2011_s - Chapter Chapter51 Discounted Cash...

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