TUESDAY THURSDAY
Discussion: Article Discussion: Articles
Time Value of Money: Time Value of Money:
Valuing Cash Flow Valuing Cash Flow
Streams, BDH, Chapter 4 Streams, BDH, Chapter 4
Applications Applications
Financial
Manager
Cash flow
Investment
Decision
(spending $)
= + + +
(1 + ) (1 + )2 (1 + )3 (1 + )
PV FV
1 1
= (1 + ) = 1 (1 + )=
(1 + )
Time Value
of Money: Valuing
Cash Flow Streams
Time Value of Money: Valuing Cash Flow
Streams
1. Valuing a Stream of Cash Flows
2. Perpetuities
3. Annuities
4. Growing Cash Flows
5. Solving for Variables Other Than Present Value or
Future Value
There is a shortcut for this calculation. We can show that the value of a growing
perpetuity is simply the cash flow divided by the difference between the interest rate
and the growth rate.
If r > g, the Present Value (PV) of a Growing Perpetuity simplifies to:
This problem can me modeled as a 30-year growing annuity, with a growth rate of 5%
and an initial cash flow of $10,000
= $150,463 1.1030
= $2.625 30
=
1 1
1
(1 + )
[or equivalently]
=
1
1
(1 + )
Applying the formula, can solve for the loan payment, C, given N=30, r = 8% (0.08) and
P=$80,000:
=
1
1
(1 + )
80,000 0.08
= = $7,106.19
1
1
(1 + 0.08)30
2000
1000
(1 r)6
1000 (1 r) 6 2000
1
2000 6
1 r
1000
1.1225,or
r 12.25%