F.Chap06

# 121 17857 year 2 cf 400 1122 31888 year 3 cf 600

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Unformatted text preview: 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 + Total 508.41 = 1,432.93 508.41 8 Example 6.3 Timeline 0 1 200 2 3 4 400 600 800 178.57 318.88 427.07 508.41 1,432.93 9 Multiple Cash Flows Using a Multiple Spreadsheet Spreadsheet You can use the PV or FV functions in Excel to You find the present value or future value of a set of cash flows cash Setting the data up is half the battle – if it is set Setting up properly, then you can just copy the formulas formulas Click on the Excel icon for an example 10 10 Multiple Cash Flows – PV Multiple Another Example Another You are considering an investment that will pay You you \$1,000 in one year, \$2,000 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? to PV = 1000 / (1.1)1 = 909.09 PV = 2000 / (1.1)2 = 1,652.89 PV = 3000 / (1.1)3 = 2,253.94 PV = 909.09 + 1,652.89 + 2,253.94 = 4,815.92 11 11 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 12 12 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; 13 13 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) 14 14 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...
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## This document was uploaded on 03/01/2014 for the course FINANCE 250 at Indiana.

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