Class4&amp;5 - Part 2

# Class4&amp;5 - Part 2 - Itsstillallaboutthe money...

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It’s still all about the  money Discounted Cash Flow  Valuation

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Multiple Cash Flows - FV 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?   0        1                            2 \$500    \$600                  \$500 x (1.09)2         \$600 x (1.09)
Multiple Cash Flows - FV 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: FV = 1,248.05(1.09)3 = 1,616.26

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Multiple Cash Flows - PV You are offered an investment that will  pay you \$200 in one year, \$400 the next  year, \$600 the next year, and \$800 at  the end of the 4th year. You can earn  12% on very similar investments. What  is the most you should pay for this  investment?
Multiple Cash Flows - PV Find the PV of each cash flow and sum  them Year 1 CF: 200 / (1.12)1 = 178.57 Year 2 CF: 400 / (1.12)2 = 318.88 Year 3 CF: 600 / (1.12)3 = 427.07 Year 4 CF: 800 / (1.12)4 = 508.41 Total PV = 178.57 + 318.88 + 427.07 +  508.41            = 1,432.93

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Multiple Cash Flows - PV 0 1 2 3 4 200 400 600 800 178.57 318.88 427.07 508.41 1,432.93
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Class4&amp;5 - Part 2 - Itsstillallaboutthe money...

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