Finans 5
Finans 5
Discounted Cash
Flow Valuation
0
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
51-1
NC-1
Chapter Outline
• Future and Present Values of Multiple
Cash Flows
• Valuing Level Cash Flows: Annuities and
Perpetuities
• Comparing Rates: The Effect of
Compounding Periods
• Loan Types and Loan Amortization
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51-3
NC-3
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51-4
NC-4
Computing APRs
• What is the APR if the monthly rate is
0.5%?
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51-6
NC-6
Things to Remember
• You ALWAYS need to make sure that the
interest rate and the time period match.
– If you are looking at annual periods, you need
an annual rate.
– If you are looking at monthly periods, you need
a monthly rate.
• If you have an APR based on monthly
compounding, you have to use monthly
periods for lump sums, or adjust the interest
rate appropriately if you have payments other
than monthly
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51-7
NC-7
• Rate = ?
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51-8
NC-8
• Rate = ?
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51-9
NC-9
ER - Formula
m×n
APR
ER 1 1
m
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NC-11
Decisions, Decisions I
• You are looking at two savings accounts.
One pays 5.25%, with daily compounding.
The other pays 5.3% with semiannual
compounding. Which account should you
use?
– First account:
• EAR = ?
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1-12
5 NC-12
Decisions, Decisions I
• You are looking at two savings accounts.
One pays 5.25%, with daily compounding.
The other pays 5.3% with semiannual
compounding. Which account should you
use?
– Second account:
• EAR = ?
• FV = ?
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5 NC-14
• FV = ?
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5 NC-15
APR m (1 ER)
1
m n
-1
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5 NC-16
APR - Example
• Suppose you want to earn an effective
rate of 12% and you are looking at an
account that compounds on a monthly
basis. What APR must they pay?
APR = ?
APR m (1 ER)
1
m n
-1
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5 NC-17
Present Value with Daily
Compounding
• You need $15,000 in 3 years for a new car.
If you can deposit money into an account
that pays an APR of 5.5% based on daily
compounding, how much would you need
to deposit?
• OPTION 1: work with daily periods
Daily rate = 0.055 / 365 = 0.00015068493
Number of days = 3(365) = 1,095
FV=?
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1-18
5 NC-18
Present Value with Daily
Compounding
• You need $15,000 in 3 years for a new car.
If you can deposit money into an account
that pays an APR of 5.5% based on daily
compounding, how much would you need
to deposit?
• OPTION 2: work with annual periods
Calculate EAR = ?
FV = ?
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5 NC-21
Example 1 Continued
• How much will you have in 5 years if you
make no further deposits?
• FV5 = ?
• First way:
Work with original cash flows
FV5 = ?
Second way:
Use value at year 2 , now it is PV2
FV5 = ?
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5 NC-23
100 300
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5 NC-26
Multiple Cash Flows – PV Example 2
• You are considering an investment that
will pay you $1,000 in one year, $2,000
in two years, and $3,000 in three years.
If you want to earn 9.65% compounded
monthly on your money, how much
would you be willing to pay for this
investment today?
• PV0 = ?
• EAR = ?
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5 NC-27
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5 NC-28
Decisions, Decisions II
• Your broker calls you and tells you that
he has this great investment opportunity.
If you invest $100 today, you will receive
$40 in one year and $75 in two years. If
you require a 14.06% compounded
monthly return on investments of this
risk, should you take the investment?
• PV0 = ?
• EAR = ?
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(1 + 𝑟)𝑛 − 1
𝐹𝑉𝐴 = 𝐶
𝑟
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Multiple Cash Flows – FV Example
• Find the value at year 3 of $7,000 that
you have in the account today.
– Today (year 0): FV3 = ?
– FV3 = ?
• Find the value at year 3 of $4,000
ordinary annuities that will be collected for
the next 3 years.
– FVA3 = ?
– FVA3 = ?
– Total FV3 = ?
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1-35
5 NC-35
Future Values for Annuities
• Suppose you begin saving for your retirement
by depositing $1,000 every six months in a
Retirement Account. If the interest rate is
5.96% compounded quarterly, how much will
you have in 40 years?
• Effective rate = ?
• FVA40×2 = FVA80 = ?
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1-36
5 NC-36
Future Values for Annuities
• Suppose you begin saving for your retirement
by depositing $500 every quarter in a
Retirement Account. If the interest rate is
5.96% compounded quarterly, how much will
you have in 40 years?
• Effective rate = ?
• FVA40×4 = FVA160 = ?
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Future Values For Annuities –5 NC-37
1-37
Another Example
• Suppose you deposit $50 per month into
an account that has an APR of 9%, based
on monthly compounding. How much will
you have in the account in 35 years?
• Effective rate = ?
• FVA35×12 = FVA420 = ?
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5 NC-38
Future Values For Annuities –
Another Example
• Suppose you deposit $150 per quarter into
an account that has an APR of 9%, based
on monthly compounding. How much will
you have in the account in 35 years?
• Effective rate= ?
• FVA35×4 = FVA140 = ?
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5 NC-39
Future Values For Annuities –
Another Example
• Suppose you deposit $150 per quarter into
an account that has an APR of 11.88%,
based on monthly compounding. How
much will you have in the account in 35
years?
• Effective rate= ?
• FVA35×4 = FVA140 = ?
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1-40
5 NC-40
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5 NC-42
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5 NC-44
Annuity – Example
After carefully going over your budget, you
have determined you can afford to pay $632
per month towards a new sports car. You call
up your local bank to find out that the going
rate is 12% per year compounded monthly
for 4 year car loans. What is the maximum
amount you can pay for a car today?
PVA0 = ?
Effective rate = ?
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5 NC-45
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5 NC-46
Buying a House
• You are ready to buy a house and you have
$20,000 for a down payment and closing
costs. Closing costs are estimated to be 4% of
the loan value. You have an annual salary of
$36,000 and the bank is willing to allow your
monthly mortgage payment to be equal to
28% of your monthly income. The interest rate
on the loan is 6% per year with monthly
compounding (.5% per month) for a 30-year
fixed rate loan. How much money will the
bank loan you? How much can you offer for
the house?
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5 NC-49
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5 NC-50
1
• ln 𝑃𝑉𝐴 = 𝑡 × ln(1 + 𝑟𝑝 )
(1− ×𝑟𝑝 )
𝐶
1
ln 𝑃𝑉𝐴
(1− 𝐶 ×𝑟𝑝 )
• 𝑡=
ln(1+𝑟𝑝 )
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5 NC-53
𝐹𝑉𝐴
• × 𝑟𝑝 = (1 + 𝑟𝑝 )𝑡 −1
𝐶
𝐹𝑉𝐴
• × 𝑟𝑝 + 1 = (1 + 𝑟𝑝 )𝑡
𝐶
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5 NC-54
𝐹𝑉𝐴
• ln × 𝑟𝑝 + 1 = 𝑡 × ln(1 + 𝑟𝑝 )
𝐶
𝐹𝑉𝐴
ln ×𝑟𝑝 +1
𝐶
• 𝑡=
ln(1+𝑟𝑝 )
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5 NC-55
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1-56
5 NC-56
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5 NC-59
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5 NC-61
Table 5.2
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5 NC-64
Perpetuity
• Perpetuity formula:
𝐶𝑡+1
PVAt∞ =
𝑟−𝑔
Example: An investment offers perpetual cash flows of
$300 every 6 months starting two years from today. The
return you require on such an investment is 8% per year
compounded semiannually. What is the value of this
investment today.
PVA3∞ = ?
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1-65
5 NC-65
Perpetuity
• Perpetuity formula:
𝐶𝑡+1
PVAt∞ =
𝑟−𝑔
Example: An investment offers perpetual cash flows of
$300 every 6 months starting two years from today. If
these CFs are growing at 1% in every 6-months and you
require a return of 8% per year compounded semiannually
on investments like this, determine the value of this
investment today.
PVA3∞ = 300/(0.04 – 0.01) = $10,000
PV0 = 10,000/(1+0.04)3 = $8,890
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5 NC-66
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5 NC-67
Pure Discount Loans
• Suppose your friend needs to borrow
some money to support himself in college.
He will graduate next year and start
working immediately. He thinks that he
can pay a maximum of $1,000 in two
years from today for this loan. If the bank
wants to earn a return of 8% per year on
this loan, what is the maximum amount
your friend can borrow from this bank?
• PV0 = ?
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1-70
5 NC-70
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1-71
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Comprehensive Problem
• An investment will provide you with $100 at the end of
each year for the next 10 years. What is the present
value of that annuity if the discount rate is 8% annually?
• What is the present value of the above if the payments
are received at the beginning of each year?
• If you deposit those payments into an account earning
8%, what will the future value be in 10 years?
• What will the future value be if you open the account with
$1,000 today, and then make the $100 deposits at the
end of each year?
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5 NC-73
FV of an Ordinary Annuity
• You are saving for a new house and you
put $10,000 per year in an account paying
8%. If the first payment is made in exactly
1 year from today and you make a total of
3 payments, how much will you have at
the end of 3 years?
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5 NC-74
0 1 2 3
FVA3 = 32,464
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5 NC-75
FV of an Annuity Due
• You are saving for a new house and you
put $10,000 per year in an account paying
8%. If the first payment is made today and
you will make a total of 3 payments, how
much will you have at the end of 3 years?
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5 NC-76
FVA2 = 32,464
FV3 = 35,016.12
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5 NC-77
PV of an Ordinary Annuity
• You are saving for a new house and you
put $10,000 per year in an account paying
8%. If the first payment is made in exactly
1 year from today and you make a total of
3 payments, what is the value of these
payments today?
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5 NC-78
0 1 2 3
PVA0 = 25,771
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1-79
5 NC-79
PV of an Annuity Due
• You are saving for a new house and you
put $10,000 per year in an account paying
8%. If the first payment is made today and
you make a total of 3 payments, what is
the value of these payments today?
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5 NC-80
PVA-1 = 25,771
FV0 = 27,832.68
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