DISCOUNTED CASH FLOW
VALUATION
R OSS, WESTERFIELD, & J ORDAN C HAPTER 6
FUTURE VALUE OF TWO PAYMENTS
You initially deposit $100 in an account and
make an additional deposit during the next
period. If the interest rate is 8%, what is the
ending balance in the account after 2
years?
SAVING UP REVISITED
You think you will be able to deposit $4000 at the end
of each of the next three years in a bank account
now paying 8% interest. You currently have $7000 in
the account. How much will you have in three years?
In four years?
TWO METHODS
You make $2000 payments for five
years. If the interest rate is 10%, what is
the ending balance in your account?
SAVING UP AGAIN
If you deposit $100 in one year, $200 in two
years, and $300 in three years, how much will
you have in three years? How much of this is
interest? How much will you have in five years if
you don't add additional amounts? Assume a 7
percent interest rate throughout.
HOW MUCH I?
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 fourth
year. You can earn 12% on very similar
investments. What is the most you should pay for
this one?
HOW MUCH II?
You are offered an investment that will make
three $5000 payments. The first payment will
occur four years from today. The second will
occur in five years, and the third will follow in
six years. If you can earn 11% what is the most
this investment is worth today? What is the
future value of the cash flows?
Number of Periods
ANNUITY TABLE
1
2
3
4
5
6
7
8
9
10
5%
0.9524
1.8594
2.7232
3.5460
4.3295
5.0757
5.7864
6.4632
7.1078
7.7217
Interest Rate
10%
15%
0.9091 0.8696
1.7355 1.6257
2.4869 2.2832
3.1699 2.8550
3.7908 3.3522
4.3553 3.7845
4.8684 4.1604
5.3349 4.4873
5.7590 4.7716
6.1446 5.0188
20%
0.8333
1.5278
2.1065
2.5887
2.9906
3.3255
3.6046
3.8372
4.0310
4.1925
FINDING A PAYMENT
• What is the annuity payment of the present value is
$100,000, the interest rate is 18%, and there are five
periods?
CREDIT CARD
You ran a little short on your spring break
vacation, so you put $1000 on your credit
card. You can afford only the minimum
payment of $20 per month. The interest rate
on the credit card is 1.5% per month. How
long will you need to pay off the $1000?
FINDING THE RATE
An insurance company offers to pay you
$1000 per year for 10 years if you pay $6710
up front. What rate is implicit in this 10 year
annuity?
LOTTERY
The Tri-State Megabucks lottery in Maine,
Vermont, and New Hampshire offers you a
choice of how to take your winnings (most
lotteries do this). In a recent drawing,
participants were offered the option of
receiving a lump sum payment of $250,000 or
an annuity of $500,000 to be received in
equal installments over a 25 year period.