lecture_chap05_06A

# 051093 161626 calculator approach first way year 0

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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...
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## This document was uploaded on 02/06/2014.

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