lecture_chap05_06A

051093 161626 calculator approach first way year 0

Info iconThis preview shows page 1. Sign up to view the full content.

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

Unformatted text preview: .60 + 4320 + 4000 = 21,803.58 • Note: later we’ll do this type of calculation in a more streamlined way Multiple Cash Flows – FV Example 2 • 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? • Formula Approach • FV = 500(1.09)2 + 600(1.09) = 1248.05 • Calculator Approach • Year 0 CF: 2 N; -500 PV; 9 I/Y; CPT FV = 594.05 • Year 1 CF: 1 N; -600 PV; 9 I/Y; CPT FV = 654.00 • Total FV = 594.05 + 654.00 = 1248.05 Multiple Cash Flows – FV Example 2 Continued • How much will you have in 5 years if you make no further deposits? • Formula Approach • First way: • FV = 500(1.09)5 + 600(1.09)4 = 1616.26 • Second way – use value at year 2: • FV = 1248.05(1.09)3 = 1616.26 • Calculator Approach • First way: • Year 0 CF: 5 N; -500 PV; 9 I/Y; CPT FV = 769.31 • Year 1 CF: 4 N; -600 PV; 9 I/Y; CPT FV = 846.95 • Total FV = 769.31 + 846.95 = 1616.26 • Second way – use value at year 2: • 3 N; -1248.05 PV; 9 I/Y; CPT FV = 1616.26 Multiple Cash Flows – FV Example 3 • 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%? • Formula Approach • FV = 100(1.08)4 + 300(1.08)2 = 136.05 + 349.92 = 485.97 • Calculator Approach • Year 1 CF: 4 N; -100 PV; 8 I/Y; CPT FV = 136.05 • Year 3 CF: 2 N; -300 PV; 8 I/Y; CPT FV = 349.92 • Total FV = 136.05 + 349.92 = 485.97 Multiple Cash Flows – PV Example 1 • You are offered an investment that will pay you $200 in one year, $400 the next year, $600 the year after, and $800 at the end of the following year. You can earn 12% on similar investments. How much is this investment worth today? Multiple Cash Flows - PV Example 1 - Timeline 0 1 200 178.57 318.88 427.07 508.41 1432.93 2 3 4 400 600 800 Multiple Cash Flows - PV Example 1 continued • Find the PV of each cash flow and add them • Formula Approach • • • • • Year 1 CF: 200 / (1.1...
View Full Document

This document was uploaded on 02/06/2014.

Ask a homework question - tutors are online