Ross_Chapter 6

Ross_Chapter 6 - Chapter 6: Discounted Cash Flow Valuation...

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Chapter 6: Discounted Cash Flow Valuation NA1003 Corporate Finance FINA1003 Corporate Finance Faculty of Business and Economics University of Hong Kong Dr. Tao Lin
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Topics Covered V and FV of multiple cash flows y PV and FV of multiple cash flows y Annuity and perpetuity oan amortization y Loan amortization y Annuity due and perpetuity due y Growing annuity and perpetuity y Interest Rates: APR, APY and EAR y Loan types and special financing
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Example Assume that the cash flows om the construction and sale from the construction and sale of an office building is as follows. Given a 7% required rate of return, find the present value and future value of the project. 2 Year 1 0 000 , 300 000 , 100 000 , 150 +
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PV of Multiple Cash Flows t=0 t=2 t=1 -$150,000 -$100,000 $300,000 $280,374 300 000 $168,574 $180,374 $300,000
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PV of Multiple Cash Flows 150 000 100 000 300 000 -$150,000 -$100,000 $300,000 t=0 t=2 t=1 -$150,000 93 458 -$100K/1.07 $262,032 $300K/1.07 2 -$93,458
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FV of Multiple Cash Flows t=0 t=2 t=1 150 000 160,500 278,735 -$150,000 -$100,000 $300,000 $160,500 -$150,000 $278,735 -$260,500
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FV of Multiple Cash Flows -$150,000 -$100,000 $300,000 1 t=0 t=2 t=1 300 000 $300,000 -$107,000 -$100K*1.07 -$150K*1.07 2 -$171,735
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Multiple Cash Flows V of multiple cash flows is equal to the m the PV of y PV of multiple cash flows is equal to the sum of the PV of individual cash flows. y FV of multiple cash flows at a given point in time is equal to e m the FV of individual cash flows at that given time the sum of the FV of individual cash flows at that given time. y Check out excel examples.
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Decisions – PV Example ur broker offers you an investment opportunity If you y Your broker offers you an investment opportunity. If you invest $100 today, you will receive $40 in one year and $75 in two years. If you require a 15% return, should you take two yea s. you equ e a 5 etu , s ou you ta e the investment? y Net Present Value = ($40/1.15 + $75/1.15 2 ) – 100 = 8.51 $.
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Multiple Cash Flows – FV Example ppose you invest $500 in a mutual fund today and $600 in y Suppose you invest $500 in a mutual fund today and $600 in one year. If the fund pays 9% annually, how much will you h ve in two years? ave two yea s? y FV = 500(1.09) 2 + 600(1.09) = 1248.05 y How much will you have in 5 years if you make no further deposits? p y FV = 500(1.09) 5 + 600(1.09) 4 = 1616.26 y FV = 1248.05(1.09) 3 = 1616.26
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Short Cuts metimes there are shortcuts that make it very easy to y Sometimes there are shortcuts that make it very easy to calculate the present value of an asset that pays off in different periods. These to l allow us to cut through the e e t pe o s. ese too s a ow us to cut t oug t e calculations quickly.
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Annuities nnuities is a finite series of equal payments that occur at y Annuities is a finite series of equal payments that occur at regular intervals. y Thus, CF = CF = CF = . .. = CF , 1 2 3 y If the first payment occurs at the end of the period, it is called an ordinary annuity y If the first payment occurs at the beginning of the period, it is called an annuity due xamples of annuities y Examples of annuities: y Installment loans (car loans, mortgages).
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This note was uploaded on 02/05/2012 for the course FBE BUSI1007 taught by Professor Lin during the Spring '11 term at HKU.

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Ross_Chapter 6 - Chapter 6: Discounted Cash Flow Valuation...

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