–ifitis.pptVIP

6 Discounted Cash Flow Valuation Key Concepts and Skills Be able to compute the future value of multiple cash flows Be able to compute the present value of multiple cash flows Be able to compute loan payments Be able to find the interest rate on a loan Understand how interest rates are quoted Understand how loans are amortized or paid off Chapter Outline Future and Present Values of Multiple Cash Flows Valuing Level Cash Flows: Annuities and Perpetuities Comparing Rates: The Effect of Compounding Loan Types and Loan Amortization Multiple Cash Flows –Future Value Example 6.1 Find the value at year 3 of each cash flow and add them together. Today (year 0 CF): 3 N; 8 I/Y; -7000 PV; CPT FV = 8817.98 Year 1 CF: 2 N; 8 I/Y; -4000 PV; CPT FV = 4665.60 Year 2 CF: 1 N; 8 I/Y; -4000 PV; CPT FV = 4320 Year 3 CF: value = 4,000 Total value in 3 years = 8817.98 + 4665.60 + 4320 + 4000 = 21,803.58 Value at year 4: 1 N; 8 I/Y; -21803.58 PV; CPT FV = 23,547.87 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? 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 – Example 2 Continued How much will you have in 5 years if you make no further deposits? 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%? 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 – Present Value Example 6.3 Find the PV of