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# Chapter 5

Discounted Cash
Flow Valuation

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1-2 5-2 Key Concepts and Skills • Be able to compute the present value of multiple cash flows 2 .

1-3 5-3 Chapter Outline • Present Values of Multiple Cash Flows • Valuing Level Cash Flows: Annuities 3 .

07 – Year 4 CF: \$800 / (1. 1-4 5-4 Multiple Cash Flows – PV • Find the PV of each cash flow and add them – Year 1 CF: \$200 / (1.07 + 508.88 – Year 3 CF: \$600 / (1.432.88 + 427.12)3 = \$427.12)1 = \$178.41 = \$1.12)2 = \$318.41 – Total PV = \$178.57 – Year 2 CF: \$400 / (1.57 + 318.93 4 .12)4 = \$508.

88 427. 1-5 5-5 Example 5.3 Time Line 0 1 2 3 4 200 400 600 800 178.57 318.07 508.93 5 .432.41 1.

89  PV = \$3. 1-6 5-6 Multiple Cash Flows – PV Another Example • You are considering an investment that will pay you \$1.253.815.000 in three years.253.94 = \$4.652.89 + 2.94  PV = \$909.000 in one year.1)1 = \$909.09 + 1.92 6 .09  PV = \$2.1)3 = \$2.000 / (1. how much would you be willing to pay?  PV = \$1.000 / (1.000 / (1.000 in two years and \$3. If you want to earn 10% on your money.652. \$2.1)2 = \$1.

1-7 5-7 Annuities Defined • 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 annuity due 7 . it is called an ordinary annuity – If the first payment occurs at the beginning of the period.

Formula • Annuities:  1   1   (1  r ) t PV  C    r    8 . 1-8 5-8 Annuities .