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Discounted Cash Flow Valuation
Chapter 6

D.Chotee FTX2020F 2013

Chapter objectives
Be able to compute the future and present value of multiple cash flows
Understand what an annuity is and how to calculate its present and future value
How to calculate the present value of a perpetuity
Appreciate the effects of compounding on interest rate quotations
Understand how loans are amortized or paid off

D.Chotee FTX2020F 2013

Readings
Chapter 6:
6.1, 6.2, 6.3, 6.4

D.Chotee FTX2020F 2013

Recap: Future Values
We know that FV = PV x (1+r)t

(1+r)t is called the future value factor
How to calculate?
◦ Calculator
◦ Tables

Future value more significant over longer periods where more interest compounded.
D.Chotee FTX2020F 2013

Recap: Present Values
Present Value = the current value of future cash flows discounted at an appropriate interest rate.
1/ (1+r)t is known as discount factor.
PV= FV x Discount Factor
Present value more insignificant over longer periods. Less money needed to accumulate big interest.
D.Chotee FTX2020F 2013

Tables
Table A1- future value factor for one unit of currency compounded at rate r for t (Page 784 of the textbook)
Table A2- present value factor for one unit of currency compounded at rate r for t periods (Page
785 of the textbook)
How to read the tables: The number of time periods are listed on the left hand side and the rate on the top.

D.Chotee FTX2020F 2013

Future Value Tables
FVof R1
1
2
3
4
5
6
7
8
9
10

1.0%
1.010
1.020
1.030
1.041
1.051
1.062
1.072
1.083
1.094
1.105

6.0%
12.0%
1.060
1.120
1.124
1.254
1.191 1.40493
1.262
1.574
1.338
1.762
1.41852 1.974
1.504
2.211
1.594
2.476
1.689
2.773
1.791
3.106
D.Chotee FTX2020F 2013

The effect of t and r on the FV factor D.Chotee FTX2020F 2013

Present Value Tables
PV R1
1
2
3
4
5
6
7
8
9
10

1 .0 %
0 .9 9 0
0 .9 8 0
0 .9 7 1
0 .9 6 1
0 .9 5 1
0 .9 4 2
0 .9 3
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