BUSINESS FINANCE教学资料 Lecture 5.pptxVIP

Lecture 5 Discounted Cash Flow ValuationWaquar Ahmadwa0004@surrey.ac.ukOverview of LectureREMEMBER!!!!Part A1 – FUTURE VALUES of Multiple Cash Flows Multiple cash flows - Saving UpYou deposit ￡1000 in one year, ￡2,000 in two years, and ￡3,000 in three years. Assume a 10% interest rate throughout. 1. How much will you have in three years? 2. How much of this is interest? 3. How much will you have in five years from now if you don’t add additional amounts? Example: Saving Up – multiple cash flows1. How much will you have in three years? (i) The ￡1,000 that you will deposit in one year, they will earn interest for two years. So, FV = PV (1+r) 2 = ￡1,000 x (1.10)2 = ￡1,210 (ii) The ￡2,000 that you will deposit in two years, they will earn interest for one year. So, FV = PV (1+r) 1 = ￡2,000 x (1.10)1 = ￡2,200 (iii) You will earn no interest on the deposit of ￡3,000 So, the total FV is ￡1,210 + ￡2,200 + ￡3,000 = ￡ 6,410Example: Saving Up – multiple cash flows2. How much of this is interest? The interest is ￡6,410 – (￡1,000 + ￡2,000 + ￡3,000) = ￡4103. How much will you have in five years from now if you don’t add additional amounts? You will have ￡6,410 in three years. You can earn interest for another two years. So, V5 = V3 (1+r)2 = ￡6,410 x (1.10)2 = ￡7,756.1 (Remember: You don’t deposit additional amounts beyond year 3) Part A2 – PRESENT VALUES of Multiple Cash Flows Present Value with Multiple Cash FlowsSuppose you need €1,500 in one year and €2,500 more in two years. If you can earn 5% on your money, how much do you have to deposit today to receive these amounts in the future? In other words, what is the present value of the two cash flows at 5%?Present Value with Multiple Cash FlowsThe PV of €2,500 in two years at 5% is: € 2,500 / (1.05)2 = € 2,267.57The PV of €1,500 in one year at 5% is: € 1,500 / 1.05 = € 1,428.57So, total PV = 2,267.57 + 1,428.57 = € 3,696.15**NOTE: Alternatively, you could use the Tables. Table A.2. For interest rate = 5% and Period = 2,