5.
Chapter
5
Discounted
Cash Flow
Valuation
5.2
Key Concepts and Skills
Be able to compute the future value of multiple
cash flows
Be able to compute the present value of
multiple cash flows
Be able to compute loan payments
Be able to find the interest rate on a loan
Understand how loans are amortized or paid
off
5.3
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
5.4
Example 5.1(p. 110)
You think you will be able to deposit ( 입금 ) $4,00
0 at the end of each of the next three years in a
bank account paying 8 % interest. You currently
have $7,000 in the account. How much will you
have in three years (3 년후 )? In four years?
5.5
Multiple Cash Flows –Future Value
Example 5.1
Find
the value at year 3 of each cash flow and add
them together.
Value at year 4:
5.6
Multiple Cash Flows – FV Example
2
Suppose you invest $500 in a mutual fund
today and $600 in one year. If the fund pays
9% annually, how much will you have in two
years?
5.7
Multiple Cash Flows – Example
Continued
How much will you have in 5 years if you
make no further deposits?
First way:
Second way – use value at year 2:
5.8
Multiple Cash Flows – FV Example
3
Suppose you plan to deposit $100 into an
account in one year and $300 into the account
in three years. How much will be in the
account in five years if the interest rate is 8%?
5.9
Example 5.3
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 year.
You can earn 12% on very similar ( 유사한 )
investments. What is most you should pay for
this one?
5.10
Multiple Cash Flows – Present
Value Example 5.3
Find the PV of each cash flow and add them
5.11
Example 5.3 Timeline
0 1 2 3 4
200 400 600 800
178.57
318.88
427.07
508.41
1432.93
5.12
Multiple Cash Flows – PV Another
Example
You are considering an investment that will
pay you $1000 in one year, $2000 in two years
and $3000 in three years. If you want to earn
10% on your money, how much would you be
willing to pay?
5.13
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 and 5 CFs =
$300. The required discount rate is 7%
What is the value of the cash flows at year 5?
What is the value of the cash flows today?
What is the value of the cash flows at year 3?
5.14
Annuities and Perpetuities Defined
Annuity ( 연금 ) – finite series of equal
payments that occur at regular intervals
Perpetuity ( 영구연금 ) – infinite series of equal
payments
5.15
Annuities and Perpetuities – Basic
Formulas
Perpetuity: PV = C / r
Annuities:
1
1
(1 r ) t
PV C
r
(1 r ) t 1
FV C
r
5.16
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 and find out that the going
rate is 1% per month for 48 months. How
much can you borrow?
5.17
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?
5.18
Finding the Payment
Suppose you want to borrow $20,000 for a new
car. You can borrow at 8% per year,
compounded monthly (8/12 = .66667% per
month). If you take a 4 year loan, what is your
monthly payment?
5.19
Example
You ran a little short on your spring break
vacation, so you put $1,000 on your credit
card. You can only afford to make the
minimum payment of $20 per month. The
interest rate on the card is 1.5% per month.
How long will you need to pay off the $1000?
5.20
Finding the Rate
Suppose you borrow $10,000 from your
parents to buy a car. You agree to pay $384.61
per month for 55 months. What is the monthly
interest rate?
5.21
Future Values for Annuities
Suppose you begin saving for your retirement
by depositing $2000 per year in an IRA. If the
interest rate is 7.5%, how much will you have
in 40 years?
5.22
Effective Annual Rate (EAR)
실효이자율
This is the actual rate paid (or received) after
accounting for compounding that occurs during the
year
일년동안 복리계산을 얼마나 자주해 주느냐를 고려하여 주는 ( 또는 받는 )
실질이자율
If you want to compare two alternative investments
with different compounding periods you need to
compute the EAR and use that for comparison.
5.23
Annual Percentage Rate
This is the annual rate that is quoted by law
By definition APR = period rate * the number
of periods per year
Consequently, to get the period rate we
rearrange the APR equation:
Period rate = APR / number of periods per year
You should NEVER divide the effective rate
by the number of periods per year – it will
NOT give you the period rate
5.24
Computing APRs
What is the APR if the monthly rate is .5%?
.5(12) = 6%
What is the APR if the semiannual rate is .5%?
.5(2) = 1%
Whatis the monthly rate if the APR is 12% with
monthly compounding?
12 / 12 = 1%
5.25
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.
5.26
Computing EARs - Example
Suppose you can earn 1% per month on $1 invested
today.
Whatis the APR?
How much are you effectively earning?
Suppose if you put it in another account, you earn 3%
per quarter.
Whatis the APR?
How much are you effectively earning?
5.27
EAR - Formula
m
APR
EAR 1 1
m
Remember that the APR is the quoted rate
5.28
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:
Second account:
Which account should you choose and why?
5.29
Computing Payments with APRs
Suppose you want to buy a new computer
system and the store is willing to sell it to
allow you to make monthly payments. The
entire computer system costs $3500. The loan
period is for 2 years and the interest rate is
16.9% with monthly compounding. What is
your monthly payment?
5.30
Future Values with Monthly
Compounding
Suppose you deposit $50 a 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?
5.31
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?
5.32
Quick Quiz – Part 5
What is the definition of an APR?
What is the effective annual rate?
Which rate should you use to compare
alternative investments or loans?
Which rate do you need to use in the time
value of money calculations?
