finance_mngmt_chap6

# finance_mngmt_chap6 - Chapter 6 Discounted Cash Flow...

This preview shows pages 1–2. Sign up to view the full content.

Chapter 6: Discounted Cash Flow Valuation 6.1 Future and Present Values of Multiple Cash Flows Example : You will 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. 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 Example : 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 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 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%?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 04/06/2012 for the course FIN 300 taught by Professor Longo during the Fall '10 term at Rutgers.

### Page1 / 3

finance_mngmt_chap6 - Chapter 6 Discounted Cash Flow...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online