Fin 390 Chapt 6

# Fin 390 Chapt 6 - Chapter 6 Discounted Cash Flow Valuation...

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Chapter 6 Discounted Cash Flow Valuation

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Chapter Outline Future and Present Values of Multiple Cash Flows Valuing Level Cash Flows: Annuities and Perpetuities Comparing Rates: The Effect of Compounding Loan Types and Loan Amortization 6C-2
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 6C-3

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Multiple Cash Flows – FV Example Suppose you plan to deposit \$100 into an account in one year and \$300 into the account in three years. How much will be in the account in five years if the interest rate is 8%? 6C-4 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 100 1.08 1.08 1.08 1.08 136.05 300 1.08 1.08 349.92 485.97
Multiple Cash Flows – Present Value Example 2 Calculate the PV of each cash flow Add them together 6C-5 R= 12% =(.12) Year 1 2 3 4 CF 200 400 600 800 Discount factor 0.89 0.80 0.71 0.64 PV 178.57 318.88 427.07 508.4 1432.93

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Example 3 Timeline 0 1 2 3 4 200 400 600 800 178.57 318.88 427.07 508.41 1,432.93 6C-6
Multiple Cash Flows Using a Spreadsheet You can use the PV or FV functions in Excel to find the present value or future value of a set of cash flows Setting the data up is half the battle – if it is set up properly, then you can just copy the formulas Click on the Excel icon for an example 6C-7

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Decisions, Decisions Your broker calls you and tells you that he has this great 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 on investments of this risk, should you take the investment? PV of \$40 in one year : 40 /1.15 = 34.78 PV of \$75 in two years: 75/(1.15x1.15) = 56.71 Total PV = ? compared to 100 6C-8
Annuities and Perpetuities Definition 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 0------1-------2------3------4------5------6------7 If the first payment occurs at the beginning of the period, it is called an annuity due 0------1-------2------3------4------5------6-----7 Perpetuity – infinite series of equal payments 0------1-------2------3------4------5------6-----7----- infinity 6C-9

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Annuities and Perpetuities Basic Formulas Perpetuity: PV = C / r Annuities: - + = + - = r r C FV r r C PV t t 1 ) 1 ( ) 1 ( 1 1 6C-10
Annuities and Perpetuities Basic Formulas Annuities Due: ) 1 ( 1 ) 1 ( ) 1 ( ) 1 ( 1 1 r r r C FV r r r C PV t t + - + = + + - = 6C-11

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Buying a House You are ready to buy a house, and you have \$20,000 for a down payment and closing costs. You
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## This note was uploaded on 02/06/2012 for the course FINANCE 390 taught by Professor Zhang during the Spring '11 term at Metro State.

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Fin 390 Chapt 6 - Chapter 6 Discounted Cash Flow Valuation...

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