# fin 600 Essay

2159 Words Sep 5th, 2014 9 Pages
FIN 600 – Lecture 3
Discounted Cash Flow Valuation

Chapter Outline
Time Value of Money
Valuation: The One-Period Case
The Multiperiod Case
Compounding Periods
Simplifications
What Is a Firm Worth?

Time Value of Money

A dollar received today is worth more than a dollar received in the future.
Interest - is the return you receive for investing your money. The interest rate is the basis for a test that any proposed investment must pass.
Example:

Putting \$100 in the bank
Earn 6% interest
After 1 year \$106

\$100

\$106

Future Values and compound rate
Future Value - Amount to which an investment will grow after earning interest.
Simple Interest - Interest earned only on the original
…show more content…
If the interest rate is 12%, what is the present value of this stream of cash flows?

If the issuer offers this investment for
\$1,500, should you purchase it?

Multiple Cash Flows
0

1

200

2

3

4

400

600

800

178.57
318.88
427.07
508.41
1,432.93

Present Value < Cost → Do Not Purchase

Valuing “Lumpy” Cash Flows
First, set your calculator to 1 payment per year.
Then, use the cash flow menu:
CF0

0

CF3

600

I

CF1

200

F3

1

NPV

F1

1

CF4

800

CF2

400

F4

1

F2

1

12

1,432.93

4.3 Compounding Periods
Compounding an investment m times a year for T years provides for future value of wealth: r

FV  C0  1  
 m

mT

Compounding Periods

For example, if you invest \$50 for 3 years at 12% compounded semiannually, your investment will grow to

 .12 
FV  \$50  1 

2 

23

 \$50  (1.06)  \$70.93

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