Professional Documents
Culture Documents
Six
Discounted Cash
Flow Valuation
6.2
6.3
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
6.4
6.5
6.6
6.7
6.8
6.9
200
178.57
318.88
427.07
508.41
1432.93
400
600
800
6.10
6.11
6.12
6.13
Decisions, Decisions
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 15% return on investments of
this risk, should you take the investment?
Use the CF keys to compute the value of the
investment
CF; CF0 = 0; C01 = 40; F01 = 1; C02 = 75; F02 = 1
NPV; I = 15; CPT NPV = 91.49
No the broker is charging more than you would be
willing to pay.
6.14
6.15
0 1 2
39
40
41
42
43
44
0 0 0
6.16
6.17
6.18
1
1
(1 r ) t
PV C
r
(1 r ) t 1
FV C
6.19
6.20
Formula:
1
1 (1.01) 48
PV 632
.01
23,999.54
6.21
6.22
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?
6.23
Total Price
Closing costs = .04(140,105) = 5,604
Down payment = 20,000 5604 = 14,396
Total Price = 140,105 + 14,396 = 154,501
6.24
6.25
6.26
6.27
6.28
6.29
6.30
6.31
6.32
6.33
6.34
Annuity Due
You are saving for a new house and you put
$10,000 per year in an account paying 8%.
The first payment is made today. How much
will you have at the end of 3 years?
FV = 10,000[(1.083 1) / .08](1.08) = 35,061.12
6.35
10000
10000
10000
32,464
35,016.12
6.36
6.37
6.38
6.39
Table 6.2
6.40
6.41
6.42
Computing APRs
What is the APR if the monthly rate is .5%?
.5(12) = 6%
6.43
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.
6.44
6.45
EAR - Formula
APR
EAR 1
6.46
Decisions, Decisions II
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 = (1 + .0525/365)365 1 = 5.39%
Second account:
EAR = (1 + .053/2)2 1 = 5.37%
6.47
Second Account:
Semiannual rate = .0539 / 2 = .0265
FV = 100(1.0265)2 = 105.37
6.48
APR m (1 EAR)
-1
6.49
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 12 (1 .12)
or 11.39%
1 / 12
1 .113 8655152
6.50
6.51
6.52
6.53
Continuous Compounding
Sometimes investments or loans are figured
based on continuous compounding
EAR = eq 1
The e is a special function on the calculator
normally denoted by ex
6.54
6.55
6.56
6.57
6.58
4N
8 I/Y
5000 PV
CPT PMT = -1509.60
6.59
6.60