finance_mngmt_chap6

finance_mngmt_chap6 - Chapter 6 Discounted Cash Flow...

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

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finance_mngmt_chap6 - Chapter 6 Discounted Cash Flow...

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