MODELING IN CORPORATE FINANCE

EXCEL TM

MODELING IN CORPORATE FINANCE

Fifth Edition .

CRAIG W. HOLDEN

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CHAPTER 1 Single Cash Flow 1

PART 1 TIME VALUE OF MONEY

Chapter 1 Single Cash Flow 1.1 Present Value Problem. A single cash flow of $1,000.00 will be received in 5 periods. For this cash flow, the appropriate discount rate / period is 6.0%. What is the present value of this single cash flow?Solution Strategy. We will calculate the present value of this single cash flow in three equivalent ways. First, we will calculate the present value using a time line, where each column corresponds to a period of calendar time. Second, we use a formula for the present value. Third, we use Excel’s PV function for the present value.FIGURE 1.1 Excel Model for Single Cash Flow - Present Value.

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• PART 1 Time Value of Money

The Present Value of this Single Cash Flow is $747.26. Notice you get the same

answer all three ways: using the time line, using the formula, or using the PV

function!

1.2 Future Value Problem. A single cash flow of $747.26 is available now (in period 0). For this cash flow, the appropriate discount rate / period is 6.0%. What is the period 5 future value of this single cash flow?Solution Strategy. We will calculate the future value of the single cash flow in three equivalent ways. First, we will calculate the future value using a time line, where each column corresponds to a period of calendar time. Second, we use a formula for the future value. Third, we use Excel’s FV function for the future value.FIGURE 1.2 Excel Model for Single Cash Flow - Future Value.

The Future Value of this Single Cash Flow is $1,000.00. Notice you get the same

answer all three ways: using the time line, using the formula, or using the FV

function! 3 / 4

CHAPTER 1 Single Cash Flow 3 Comparing Present Value and Future Value, we see that they are opposite operations. That is, one operation "undoes" the other. The Present Value of $1,000.00 in period 5 is $747.26 in period 0. The Future Value of $747.26 in period 0 is $1,000.00 in period 5.Problems

• A single cash flow of $1,673.48 will be received in 4 periods. For this cash

flow, the appropriate discount rate / period is 7.8%. What is the present value of this single cash flow?

• A single cash flow of $932.47 is available now (in period 0). For this cash

flow, the appropriate discount rate / period is 3.9%. What is the period 4 future value of this single cash flow?

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