lecture_chap05_06A

# 11 90909 pv 2000 112 165289 pv 3000 113

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Unformatted text preview: 2)1 = 178.57 Year 2 CF: 400 / (1.12)2 = 318.88 Year 3 CF: 600 / (1.12)3 = 427.07 Year 4 CF: 800 / (1.12)4 = 508.41 Total PV = 178.57 + 318.88 + 427.07 + 508.41 = 1432.93 Multiple Cash Flows - PV Example 1 continued • Calculator Approach • Year 1 CF: N = 1; I/Y = 12; FV = 200; CPT PV = -178.57 • Year 2 CF: N = 2; I/Y = 12; FV = 400; CPT PV = -318.88 • Year 3 CF: N = 3; I/Y = 12; FV = 600; CPT PV = -427.07 • Year 4 CF: N = 4; I/Y = 12; FV = 800; CPT PV = 508.41 • Total PV = 178.57 + 318.88 + 427.07 + 508.41 = 1432.93 Multiple Cash Flows – PV Example 2 • You are considering an investment that will pay you \$1000 in one year, \$2000 in two years and \$3000 in three years. If you want to earn 10% on your money, how much would you be willing to pay? Multiple Cash Flows – PV Example 2 continued • Formula Approach • • • • PV = 1000 / (1.1)1 = 909.09 PV = 2000 / (1.1)2 = 1652.89 PV = 3000 / (1.1)3 = 2253.94 PV = 909.09 + 1652.89 + 2253.94 = 4815.93 • Calculator Approach • • • • N = 1; I/Y = 10; FV = 1000; CPT PV = -909.09 N = 2; I/Y = 10; FV = 2000; CPT PV = -1652.89 N = 3; I/Y = 10; FV = 3000; CPT PV = -2253.94 PV = 909.09 + 1652.89 + 2253.94 = 4815.93 Multiple Uneven Cash Flows – Using the Calculator • See the cash flow buttons on your calculator • Labels on the keys / arguments to the functions will be: • • • • CF for cash flow F for frequency NPV for net present value IRR for the interest rate Problem: Decisions, Decisions • Your broker calls you and tells you that he has an investment 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? • Calculator entry: • CF0 = 0 • CF1 = 40 (F1=1) • CF2 = 75 (F2=1) • I = 15 • CPT NPV = 91.49 • So answer = no. The broker is charging more than you would be willing to pay. Problem - Saving For Retirement • You are offered the opportunity to put some money away for retirement. You will receive fiv...
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## This document was uploaded on 02/06/2014.

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