Chapter_6_FI311_FA2011_SS

Chapter_6_FI311_FA2011_SS - Click to edit Master title...

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Unformatted text preview: Click to edit Master title style 12/29/11 1 12/29/11 Chapter 6 Discounted Cash Flow Valuation Formulas Click to edit Master title style 12/29/11 2 12/29/11 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 12/29/11 3 12/29/11 • 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 12/29/11 4 12/29/11 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 12/29/11 5 12/29/11 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 12/29/11 6 12/29/11 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 12/29/11 7 12/29/11 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 12/29/11 8 12/29/11 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 12/29/11 9 12/29/11 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 12/28/2011 for the course FI 311 taught by Professor Booth during the Fall '06 term at Michigan State University.

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Chapter_6_FI311_FA2011_SS - Click to edit Master title...

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