Chapter006_Formulas_2nd

# Your money how much would you be willing to pay to pv

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Unformatted text preview: even Cash Flows – Multiple Using the Calculator Using Another way to use the financial calculator for uneven cash flows is Another to use the cash flow keys to Press CF and enter the cash flows beginning with year 0. You have to press the “Enter” key for each cash flow Use the down arrow key to move to the next cash flow The “F” is the number of times a given cash flow occurs in The consecutive periods consecutive Use the NPV key to compute the present value by entering the Use interest rate for I, pressing the down arrow and then compute interest Clear the cash flow keys by pressing CF and then CLR Work 12 Decisions, Decisions Your broker calls you and tells you that he has this great investment Your 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? investments Use the CF keys to compute the value of the investment • CF; CF0 = 0; C01 = 40; F01 = 1; C02 = 75; F02 = 1 • NPV; I = 15; CPT NPV = 91.49 No – the broker is charging more than you would be willing No to pay. to 13 Saving For Retirement You are offered the opportunity to put some You money away for retirement. You will receive five annual payments of \$25,000 each beginning in 40 years. How much would you be willing to invest today if you desire an interest rate of 12%? rate Use cash flow keys: • CF; CF0 = 0; C01 = 0; F01 = 39; C02 = 25,000; F02 = 5; NPV; I = 12; CPT NPV = 1,084.71 NPV; 14 Saving For Retirement Timeline 012 … 39 40 41 42 000 … 0 25K 25K 25K 43 44 25K 25K Notice that the year 0 cash flow = 0 (CF0 = 0) The cash flows years 1 – 39 are 0 (C01 = 0; F01 = 39) The cash flows years 40 – 44 are 25,000 (C02 = 25,000; F02 = 5) 15 Quick Quiz – Part I Suppose you are looking at the following possible cash Suppose flows: Year 1 CF = \$100; Years 2 and 3 CFs = \$200; Years 4 and 5 CFs = \$300. The required discount rate is 7% 7% What is the value of the cash flows at year 5? What is the value of the cash flows today? What is the value of the cash flows at year 3? 16 Annuities and Perpetuities Annuities Defined Defined Annuity – finite series of equal payments that Annuity occur at regular intervals occur If the first payment occurs at the end of the period, it If is called an ordinary annuity is If the first payment occurs at the beginning of the If period, it is called an annuity due period, Perpetuity – infinite series of equal payments 17 Annuities and Perpetuities – Annuities Basic Formulas Basic Perpetuity: PV = C / r Annuities: 1 1− (1 + ) t r PV = C r 1 + )t − ( r 1 FV = C r 18 Annuities and the Calculator You can use the PMT key on the calculator for You the equal payment the The sign convention still holds Ordinary annuity versus annuity due You can switch your calculator between the two You types by using the 2nd BGN 2nd Set on the TI BA-II types Plus If you see “BGN” or “Begin” in the display of your If calculator, you have it set for...
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## This document was uploaded on 10/01/2013.

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