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Future value
Present value
Rates of return
Amortization
Required investments
in operating capital
Value =
FCF1
(1 + WACC)1
FCF2
+
(1 + WACC)2
... + FCF
+
(1 +
WACC)
Weighted average
cost of capital
(WACC)
Market interest rates
Cost of debt
Cost of equity
CF1
CF2
CF3
I%
CF0
I%
2 Year
100
I%
100
100
100
100
75
50
I%
-50
10%
100
FV = ?
After 1 year
FV1 =
=
=
=
PV + INT1 = PV + PV (I)
PV(1 + I)
$100(1.10)
$110.00
After 2 years
FV2 =
=
=
=
10
After 3 years
FV3 =
=
=
=
FV2(1+I)=PV(1 + I)2(1+I)
PV(1+I)3
$100(1.10)3
$133.10
In general,
FVN = PV(1 + I)N
11
12
Financial calculator:
HP10BII
HP10BII (Continued)
15
Financial Calculator
Solution
Financial calculators solve this
equation:
FVN + PV (1+I)N = 0.
There are 4 variables. If 3 are
known, the calculator will solve
for the 4th.
16
3
N
10
-100
I/YR PV
0
PMT
FV
133.10
Spreadsheet Solution
18
10%
3
100
19
PV
=
FVN
(1+I)N
= FVN
1
PV = $100
1.10
1
1+
I
= $100(0.7513) = $75.13
20
Financial Calculator
Solution
INPUTS
OUTPUT
3
N
10
I/YR
PV
-75.13
0
PMT
100
FV
Spreadsheet Solution
22
20%
?
2
Time to Double
(Continued)
$2
(1.2)N
N LN(1.2)
N
N
=
=
=
=
=
$1(1 + 0.20)N
$2/$1 = 2
LN(2)
LN(2)/LN(1.2)
0.693/0.182 = 3.8
24
Financial Calculator
Solution
INPUTS
N
OUTPUT 3.8
20
I/YR
-1
PV
0
PMT
2
FV
25
Spreadsheet Solution
26
0
-1
?%
FV=
$2=
(2)(1/3) =
1.2599=
I=
3
2
PV(1 + I)
$1(1 + I)3
(1 + I)
(1 + I)
0.2599 = 25.99%
N
27
Financial Calculator
INPUTS
OUTPUT
3
N
I/YR
25.99
-1
PV
0
PMT
2
FV
28
Spreadsheet Solution
29
I%
PMT
PMT
PMT
PMT
PMT
Annuity Due
0
PMT
I%
30
10%
100
100
FV
100
110
121
= 331
31
FV Annuity Formula
(1+I)N-1
I
(1+0.10)3-1
0.10
=
$331
32
Financial Calculator
Formula
for Annuities
FVN + PV(1+I)N +
PMT
(1+I)N-1
I
=0
Financial Calculator
Solution
INPUTS
OUTPUT
10
-100
I/YR
PV
PMT
FV
331.00
Spreadsheet Solution
35
100
100
100
10%
90.91
82.64
75.13
248.69 = PV
36
PV Annuity Formula
= PMT 1
I
1
I (1+I)N
1
= $100 1
=
0.1
0.1(1+0.1)3 $248.69
37
Financial Calculator
Solution
INPUTS
OUTPUT
10
I/YR
PV
100
PMT
FV
-248.69
Spreadsheet Solution
39
10
0
10
0
10%
10
0
40
PV of annuity due:
= (PV of ordinary annuity) (1+I)
= ($248.69) (1+ 0.10) = $273.56
FV of annuity due:
= (FV of ordinary annuity) (1+I)
= ($331.00) (1+ 0.10) = $364.10
41
INPUTS
OUTPUT
10
I/YR
PV
100
PMT
FV
-273.55
42
INPUTS
OUTPUT
10
I/YR
100
PV
PMT
FV
-364.10
43
=FV(0.10,3,-100,0,1)
44
1
10%
100
530.08 = PV
300
300
-50
45
Financial calculator:
HP10BII
Financial calculator:
HP10BII (more)
CF0
CF1
CF2
CF3
CF4
=
=
=
=
=
0
100
300
300
-50
49
8%; Quarterly
8%, Daily interest (365 days)
50
Examples:
The Impact of
Compounding
52
The Impact of
Compounding (Answer)
LARGER!
FVN = PV 1
+
INOM
M
MN
54
INOM
M
0.12
= $100 1
2
= $100(1.06)10
MN
2x5
= $179.08
55
=
$176.2
3
FV(Semi. = $100(1.06)10
)
FV(Quar. = $100(1.03)20
)
$179.0
8
$180.6
1
56
57
FV = $1 (1.06)2 = $1.1236.
EFF% = 12.36%, because $1 invested for
one year at 12% semiannual
compounding would grow to the same
value as $1 invested for one year at
12.36% annual compounding.
58
Comparing Rates
INOM
1 +
M
0.12
1 +
2
= (1.06)2 - 1.0
= 0.1236 =
12.36%.
60
61
= 12%.
EARQ
= (1 + 0.12/4)4 - 1
= 12.55%.
EARM
= (1 + 0.12/12)12 - 1 = 12.68%.
EARD(365) = (1 + 0.12/365)365 - 1=
12.75%.
62
63
64
Amortization
Construct an amortization
schedule for a $1,000, 10% annual
rate loan with 3 equal payments.
67
10%
-1,000
INPUTS
OUTPUT
3
N
PMT
PMT
PMT
10
I/YR
-1000
PV
PMT
0
FV
402.11
68
69
70
Amortization Table
BEG
BAL
$1,00
0
PMT
$402
698
402
70
332
366
366
402
37
366
1,206.34 206.34
1,00
0
YEAR
1
TOT
PRIN
INT
PMT
$100 $302
END
BAL
$698
72
73
74
IPER = 11.33463%/365
= 0.031054% per day
0
273
0.031054%
-100
FV=?
76
Find FV
FV273
= $100
(1.00031054)273
= $100 (1.08846) =
$108.85
77
Calculator Solution
IPER = INOM/M
= 11.33463/365
= 0.031054 per day.
INPUTS
273
N
OUTPUT
I/YR
-100
PV
PMT
FV
108.85
78
79
5%
100
100
6-mos.
periods
100
80
81
5%
2
100
4
100
6
100.00
110.25
121.55
331.80
EFF% =
10.25%
0.10
1 +
2
1=
83
INPUTS
OUTPUT
10.25
-100
I/YR
PV
PMT
FV
331.80
84
5%
90.70
82.27
74.62
247.59
100
100
100
85
Comparing Investments
365
-850
456 days
1,000
87
88
=
=
$850(1.00018538)456
$924.97 in bank.
Calculator Solution to FV
IPER = INOM/M
= 6.76649/365
= 0.018538 per day.
INPUTS
456
N
OUTPUT
I/YR
-850
PV
PMT
FV
924.97
90
$1,000/(1.00018538)456
$918.95
INPUTS
6.76649/365 =
456 .018538
N
OUTPUT
I/YR
PV
0
PMT
1000
FV
-918.95
3. Rate of Return
Find the EFF% on note and
compare with 7.0% bank pays,
which is your opportunity cost of
capital:
FVN = PV(1 + I)N
$1,000= $850(1 + I)456
Now we must solve for I.
93
Calculator Solution
INPUTS
OUTPUT
456
N
-850
I/YR
PV
0.035646%
per day
1000
PMT
FV
Convert % to decimal:
Decimal = 0.035646/100 = 0.00035646
EAR = EFF% = (1.00035646)365 - 1
= 13.89%.
94
= 13.01