Chapter 06 – Discounted Cash Flow Valuation
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Chapter 6
DISCOUNTED CASH FLOW VALUATION
CHAPTER WEB SITES
Section
Web Address
CHAPTER ORGANIZATION
6.1 Future and Present Values of Multiple Cash Flows
6.2 Valuing Level Cash Flows: Annuities and Perpetuities
6.3 Comparing Rates: The Effect of Compounding
6.4 Loan Types and Loan Amortization
6.5 Summary and Conclusions
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ANNOTATED CHAPTER OUTLINE
6.1. Future and Present Values of Multiple Cash Flows
A. Future Value with Multiple Cash Flows
B. Present Value with Multiple Cash Flows
C. A Note about Cash Flow Timing
6.2. Valuing Level Cash Flows: Annuities and Perpetuities
A. Present Value for Annuity Cash Flows
Ordinary Annuity – multiple, identical cash flows occurring at the
end of each period for a fixed number of periods.
Lecture Tip: The annuity factor approach is a short-cut approach
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Lecture Tip: How could you answer the following questions
without preparing an amortization table?
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The outstanding balance of the loan at any time equals the present
Finding the number of payments given PV, C and r:
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B. Future Value for Annuities
C. A Note about Annuities Due
Annuity due – the first payment occurs at the beginning of the
period instead of the end.
Lecture Tip: It should be emphasized that annuity factor tables
(and the annuity factors in the formulas) assume that the first
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D. Perpetuities
E. Growing Annuities and Perpetuities
6.3. Comparing Rates: The Effect of Compounding
A. Effective Annual Rates and Compounding
Lecture Tip: It is important to stress that the effective annual rate
is the rate of interest that we effectively earn after accounting for
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B. Calculating and Comparing Effective Annual Rates (EAR)
Lecture Tip: Here is a way to drive the point of this section home.
Ask how many students have taken out a car loan. Now ask one of
C. EARs and APRs
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Lecture Tip: Why might credit card issuers want low required
Ethics Note: Rent-to-own agreements and tax refund loans have a
lot in common. Because of the structure of the contracts, they do
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Lecture Tip: Another point of confusion for many students is what
to do when the payment period and the compounding period don’t
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D. Taking It to the Limit: A Note About Continuous Compounding
6.4. Loan Types and Loan Amortization
A. Pure Discount Loans
C. Amortized Loans
6.5. Summary and Conclusions