Multiple Cash Flows - I
Multiple Cash Flows - I
Multiple Cash Flows - I
Consider an investment that pays $200 one year from now, with cash
flows increasing by $200 per year through year four. If the interest
rate is 12 percent, 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 – II
0 1 2 3 4
318.88
427.07
508.41
1,432.93 Present Value < Cost → Do Not Purchase
4-2
4.3 Compounding Periods
Perpetuity
A constant stream of cash flows that lasts forever
Growing perpetuity
A stream of cash flows that grows at a constant rate
forever
Annuity
A stream of constant cash flows that lasts for a fixed
number of periods
Perpetuity
…
Perpetuity: Example
…
Growing Perpetuity: Example
The expected dividend next year is $1.30, and
dividends are expected to grow at 5 percent forever.
…
Annuity: Example I
If you can afford a $400 monthly car payment, how
much car can you afford if interest rates are 7 percent
on 36-month loans?
0 1 2 3 4 5
= $297.22