5 Discounted Cash Flow Valuation

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1、DiscountedCashFlowValuationChapterOutline•TheOne-PeriodCase•TheMultiperiodCase•CompoundingPeriods•SimplificationsDiscountedCashFlowValuation•Adollartodayismorevaluablethanadollartobereceivedinthefuture•Why?–Adollartodayismorevaluablebecause:•Itcanbeinvestedtomake

2、moredollars•Itcanbeimmediatelyconsumed•ThereisnodoubtaboutitsreceiptAnImportantCorollary•Ifyouknowyourrequiredrateofreturnandthelengthoftimebeforecashisharvested,youcancalculatesomecriticalmetrics:–Thevaluetodayofapaymenttobereceivedinthefuture•Thismeasureiscalle

3、da“PresentValue”–Thevalueinthefutureofasuminvestedtoday•Thismeasureiscalleda“FutureValue”–PresentandFutureValuescanbecalculatedoversingleandmultipleperiods1TheOne-periodCase2TheMultiperiodCase3CompoundingPeriods4Simplifications1TheOne-PeriodCase•Ifyouweretoinvest

4、$10,000at5-percentinterestforoneyear,yourinvestmentwouldgrowto$10,500.$500wouldbeinterest($10,000×.05)$10,000istheprincipalrepayment($10,000×1)$10,500isthetotaldue.Itcanbecalculatedas:$10,500=$10,000×(1.05)ThetotalamountdueattheendoftheinvestmentiscalltheFutureV

5、alue(FV).FutureValue•Intheone-periodcase,theformulaforFVcanbewrittenas:FV=C×(1+r)0WhereC0iscashflowtoday(timezero),andristheappropriateinterestrate.PresentValue•PresentValueistoday’svalueofasumtobereceivedinthefuturegivenaspecificrateofinterestandtimehorizon.•Sup

6、poseyouwerepromised$10,000dueinoneyearwheninterestratesare5-percent.Yourinvestmentbeworth$9,523.81intoday’sdollars.$10,000$9,523.811.05Theamountthataborrowerwouldneedtosetasidetodaytobeabletomeetthepromisedpaymentof$10,000inoneyearisthePresentValue(PV).Notethat$

7、10,000=$9,523.81×(1.05).PresentValue•Intheone-periodcase,theformulaforPVcanbewrittenas:C1PV1rWhereC1iscashflowatdate1,andristheappropriateinterestrate.NetPresentValue•TheNetPresentValue(NPV)ofaninvestmentisthepresentvalueoftheexpectedcashflows,lessthecostofthei

8、nvestment.•Supposeaninvestmentthatpromisestopay$10,000inoneyearisofferedforsalefor$9,500.Yourinterestrateis5%.•Shouldyoubuy?NetPresentValue$10,000NPV$9,5001