Chapter 6 Discounted Cash Flow Valuation 25
25 Chapter 6 Discounted Cash Flow Valuation
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 26
26 Chapter Outline n Future and Present Values of Multiple Cash Flows n Valuing Level Cash Flows: Annuities and Perpetuities n Comparing Rates: The Effect of Compounding Periods n Loan Types and Loan Amortization
Present Value Example 5.3 Time Line 2 3 4 200 400 600 800 178.57☐ 318.88 427.07 508.41 1,432.93 27
27 Present Value Example 5.3 Time Line 0 1 2 3 4 200 400 600 800 178.57 318.88 427.07 508.41 1,432.93
Annuities and Perpetuities-Basic Formulas Perpetuity:PV=C/r ■Annuities: 1- 1 PV C (1+r) FV .c 28
28 Annuities and Perpetuities – Basic Formulas n Perpetuity: PV = C / r n Annuities: r r FV C r r PV C t t (1 ) 1 (1 ) 1 1
Effective Annual Rate (EAR) This is the actual rate paid (or received)after accounting for compounding that occurs during the year If you want to compare two alternative investments with different compounding periods you need to compute the EAR and use that for comparison. 29
29 Effective Annual Rate (EAR) n This is the actual rate paid (or received) after accounting for compounding that occurs during the year n If you want to compare two alternative investments with different compounding periods you need to compute the EAR and use that for comparison