Chapter 6_S - 1 Chapter 6 Discounted Cash Flow Valuation...

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Unformatted text preview: 1 Chapter 6: Discounted Cash Flow Valuation Future and Present Values of Multiple Cash Flows Valuing Level Cash Flows: Annuities and Perpetuities Comparing Rates: The Effect of Compounding Loan Types 2 Multiple Cash Flows –FV Example 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? Find the value at year 3 of each cash flow and add them together Value at year 4 3 Multiple Cash Flows – PV Example 1 You are offered an investment that will pay you $200 in one year, $400 in two years, $600 in three years and $800 in four years. You can earn 12 percent on very similar investments. How much is this investment worth today? 4 PV Example 1 Timeline 1 2 3 4 200 400 600 800 178.57 318.88 427.07 508.41 1,432.93 5 Multiple Uneven Cash Flows – Using the Calculator Another way to use the financial calculator for uneven cash flows is to use the cash flow keys Press CF and enter the cash flows beginning with year 0. You have to press the “Enter” key for each cash flow Use the down arrow key to move to the next cash flow The “F” is the number of times a given cash flow occurs in consecutive periods Use the NPV key to compute the present value by entering the interest rate for I, pressing the down arrow, and then computing the answer Clear the cash flow worksheet by pressing CF and then 2 nd CLR Work 6 Multiple Cash Flows – PV Example 2 You are offered the opportunity to put some money away for retirement. You will receive five annual payments of $25,000 each beginning in 40 years. How much would you be willing to invest today if you desire an interest rate of 12%? Formula: Calculator: 7 Multiple Cash Flows – PV Example 2 Timeline 0 1 2 … 39 40 41 42 43 44 0 0 0 … 0 25K 25K 25K 25K 25K Notice that the year 0 cash flow = 0 (CF = 0) The cash flows years 1 – 39 are 0 (C01 = 0; F01 = 39) The cash flows years 40 – 44 are 25,000 (C02 = 25,000; F02 = 5) 8 Annuities and Perpetuities Defined Annuity – finite series of equal payments that occur at regular intervals If the first payment occurs at the end of the period, it is called an ordinary annuity If the first payment occurs at the beginning of the period, it is called an annuity due Perpetuity – infinite series of equal payments 9...
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This note was uploaded on 01/13/2012 for the course FR 403 taught by Professor Hoffman during the Spring '11 term at Central Washington University.

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Chapter 6_S - 1 Chapter 6 Discounted Cash Flow Valuation...

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