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    Chap 005

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    sueern
    If you can earn 12%, what is the most this investment is worth today? Find the PV of each cash flow and add them Quick Quiz: Part 1 Suppose you are looking at the following possible cash flows: year 1 CF = $100; years 2 and 3 CFs = $200; years 4=0 and year 5 CFs= $300. The required discount rate is 7% what is the value of the cash flows at year 3? (PV= $645.3)

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    Chap 005

    Uploaded by

    sueern
    411 views25 pages
    If you can earn 12%, what is the most this investment is worth today? Find the PV of each cash flow and add them Quick Quiz: Part 1 Suppose you are looking at the following possible cash flows: year 1 CF = $100; years 2 and 3 CFs = $200; years 4=0 and year 5 CFs= $300. The required discount rate is 7% what is the value of the cash flows at year 3? (PV= $645.3)

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    If you can earn 12%, what is the most this investment is worth today? Find the PV of each cash flow and add them Quick Quiz: Part 1 Suppose you are looking at the following possible cash flows: year 1 CF = $100; years 2 and 3 CFs = $200; years 4=0 and year 5 CFs= $300. The required discount rate is 7% what is the value of the cash flows at year 3? (PV= $645.3)

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    411 views25 pages

    Chap 005

    Uploaded by

    sueern
    If you can earn 12%, what is the most this investment is worth today? Find the PV of each cash flow and add them Quick Quiz: Part 1 Suppose you are looking at the following possible cash flows: year 1 CF = $100; years 2 and 3 CFs = $200; years 4=0 and year 5 CFs= $300. The required discount rate is 7% what is the value of the cash flows at year 3? (PV= $645.3)

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 25

    Chapter 5

    Discounted Cash
    Flow Valuation

    1
    McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
    1-2 5-2

    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

    2
    1-3 5-3

    Time line - Chapter 4


    T= 0 1 2 3 4 5
    _____________________________________________

    PV FV

    PV = Present Value
    FV = Future Value
    t = Numbers of period
    r = Interest rate

    •Single cash flow: FV=PV(1+r)t

    3
    1-4 5-4

    Time line - Chapter 5


    T= 0 1 2 3 4 5
    _____________________________________________

    CF1 CF2 CF3 CF4 CF5


    PV FV
    CF1= Cash Flow in Yr1
    CF2= Cash Flow in Yr2
    CF3= Cash Flow in Yr3
    CF4= Cash Flow in Yr4
    CF5= Cash Flow in Yr5
    •Multiple cash flows valuation: PV or FV
    4
    1-5 5-5

    Uneven Cash Flows – Future Value


    Example
    • You can deposit $4000 at the end of
    the next three years in a bank
    account paying 8% interest. You
    currently have $7000 in the account.
    How much will you have in three
    years? In four years?

    • Find the future value of each cash


    flow and add them together.
    5
    1-6 5-6

    Uneven Cash Flows – Present


    Value Example
    • You are offered an investment that will pay
    you $200 in one year, $400 the next year,
    $600 the next year, and $800 at the end of
    the next. If you can earned 12%, what is
    the most this investment is worth today?

    • Find the PV of each cash flow and add them

    6
    1-7 5-7

    Quick Quiz: Part 1


    • Suppose you are looking at the following
    possible cash flows: Year 1 CF = $100; Years 2
    and 3 CFs = $200; Years 4=0 and Year 5 CFs =
    $300. The required discount rate is 7%
    • What is the value of the cash flows at year 5?
    (FV5 = $905.07)
    • What is the value of the cash flows today?
    (PV= $645.3)
    • What is the value of the cash flows at year 3?
    (FV3= $790.52)

    7
    1-8 5-8
    Level Cash Flows: Annuities
    and Perpetuities
    • Annuity – finite series of equal payments
    that occur at regular intervals
    – If the first payment occurs at the end of the
    period, it is called an ordinary annuity
    – If the first payment occurs at the beginning of
    the period, it is called an annuity due

    8
    1-9 5-9

    Annuities– Basic Formulas


    • Annuities (ordinary):
     1 
     1 − 
    (1 + r) t
    PV =C  
     r 

     

    (1 +r) t −1 
    FV =C  
     r 
    C = equal cash flow (PMT)
    9
    5-10
    1-10

    Annuities– Tables
    • Annuities (ordinary):
    PV = C * PVIFA (r%, t)
    App. A3 (pg.584)

    FV = C * FVIFA (r%, t)
    App. A4 (pg.586)

    10
    5-11
    1-11

    Present Value of Annuity


    • You won a lottery. The money is paid in
    equal annual installments of $100,000 over
    3 years. If the appropriate discount rate is
    5%, how much is the lottery actually worth
    today?

    11
    5-12
    1-12

    Future Values for Annuities


    • Suppose you begin saving for your retirement by
    depositing $2000 per year in an trust. If the
    interest rate is 8%, how much will you have in 40
    years?

    12
    5-13
    1-13

    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?
    13
    5-14
    1-14

    Buying a House - Continued

    14
    5-15
    1-15

    Quick Quiz: Part 2


    • You know the payment amount for a loan
    and you want to know how much was
    borrowed. Do you compute a present
    value or a future value?
    • You want to receive $5000 per month in
    retirement. If you can earn .75% per
    month and you expect to need the income
    for 25 years, how much do you need to
    have in your account at retirement?

    15
    5-16
    1-16

    Finding the Payments


    • Suppose you want to borrow $20,000 for a
    new car. You can borrow at 8% per year
    compounded monthly. If you take a 4 year
    loan, what is your monthly payment?

    16
    5-17
    1-17

    Finding the Number of Payments


    • You have $1000 balance debt on your
    credit card. You can only make a payment
    of $20 per month. The interest rate is
    1.5% per month. How long will you need
    to pay off the $1000.

    17
    5-18
    1-18

    Finding the Rate

    – Financial Calculator
    – Table
    – Trial and error

    18
    5-19
    1-19
    Finding the rates-Example
    Suppose you borrow $10,000 from your parents to buy a
    car. You agree to pay $2504.56 per year for 5 years.
    What is the interest rate?

    19
    5-20
    1-20

    Quick Quiz: Part 3


    • Suppose you have $200,000 to deposit
    and can earn 0.75% per month.
    – How many months could you receive
    the $5000 payment? (t=47.73mths)
    – How much could you receive every
    month for 5 years? (c=$4151.67)

    20
    5-21
    1-21

    Annuity Due
    • First payment occurs at the beginning of the
    period
    • Annuity due value=ordinary annuity value*(1+r)

     1 
    1−
     t 
    (1 + r )
    PV =C (1 +r)
     r 
     
     
    (1 +r) t −1
    FV =C (1 +r)

     r 

    21
    5-22
    1-22

    Annuity Due Timeline


    You are saving for a new house and you put $10,000 per year
    in an account paying 8% for 3 years. The first payment is made
    today. How much will you have at the end of year 3?

    22
    5-23
    1-23
    Perpetuity – Example
    • Infinite series of equal payments
    – Perpetuity formula: PV = C / r
    • A preferred stock offers dividend of $2 per
    year, What is the price of that stock is
    going to sell if the required rate of return is
    8%?

    23
    5-24
    1-24

    Quick Quiz: Part 4


    • You want to have $1 million to use for retirement
    in 35 years. If you can earn 1% per month, how
    much do you need to deposit on a monthly basis
    if the first payment is made in one month?
    • You are considering preferred stock that pays a
    quarterly dividend of $1.50. If your desired return
    is 12% per year, how much would you be willing
    to pay?

    24
    5-25
    1-25

    Tutorial
    • Problem 6, 21, 26, 28, 30, 35, 47 and 49
    from page 153

    25

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