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Lecture 2

FIN300 Lecture 2: Chapter 6 – Discounted Cash Flow Valuation.docx

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Department
Finance
Course
FIN 300
Professor
Vikraman Baskaran
Semester
Winter

Description
Chapter 6 – Discounted Cash Flow Valuation 6.1 – Future and Present Values of Multiple Cash Flows ­ Two ways to calculate future values for multiple cash flows o Compound the accumulated balance forward one year at a time o Calculate the future value of each cash flow first and then add them up READ BOOK FOR EXAMPLE ON CALCULATION Present Value with Multiple Cash Flows ­ Two ways to do determine the present value of multiple future cash flows o Discount one period at a time o Calculate the present values individually and add them up ­ The present value of a series of future cash flows is simply the amount you would  need today in order to exactly duplicate those future cash flows ­ Alternative way of calculating present values for multiple future cash flows is to  discount back to the present, one period at a time READ BOOK FOR EXAMPLE ON CALCULATION NOTE: Unless explicitly told otherwise, all cash flows occur at the end of each period. 6.2 Valuing Level Cash Flows: Annuities and Perpetuities Annuity – a level stream of cash flows for a fix period of time (a series of constant cash  flows) Present Value for Annuity Cash Flows INCREASING DISCOUNT RATE LOWERS PV!!!! Future Value for Annuities A Note on Annuities Due Annuity Due – an annuity for which the cash flows occur at the beginning of the period ­ Ex; a lease ­ Works for both present and future values o Calculative the value of an annuity due involves two steps  Calculate the present/future value as though it were an ordinary  annuity  Multiply your answer by (1+r) Perpetuities Perpetuity – an annuity in which the cash flows continue forever Consol – a type of perpetuity FUTURE VALUE OF C = FV = C x ((1+r)^t – 1)/r) ­ WHEN IT IS COMPOUNDED MONTHLY – DIVIDE r BY 12 before ADDING IT  TO 1 An investment will pay you $24,000 in 4 years. If the appropriate discount rate is 7.3 percent compounded daily, what is the present value? PV = FV/Basic Present Value Equation (1+r/365)^365xt WHEN CALCULATING # OF PERIODS WHEN YOU HAVE FV, AND INITIAL  INVESTMENT AND DISCOUNT RATE… ­ t = ln(FV/Initial)/ln(1+r/m)) Growing Perpetuities Growing 
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