Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionIII. Valuation of Future
Cash Flows- Discounted Cash Flow
Valuation
(^194) © The McGraw−Hill
Companies, 2002
164 PART THREE Valuation of Future Cash Flows
Now you can write down this answer to save it, but that’s inefficient. All calculators have a
memory where you can store numbers. Why not just save it there? Doing so cuts way
down on mistakes because you don’t have to write down and/or rekey numbers, and it’s
much faster.
Next we value the second cash flow. We need to change N to 2 and FV to 400. As long
as we haven’t changed anything else, we don’t have to reenter %i or clear out the calcu-
lator, so we have:
You save this number by adding it to the one you saved in our first calculation, and so on
for the remaining two calculations.
As we will see in a later chapter, some financial calculators will let you enter all of the
future cash flows at once, but we’ll discuss that subject when we get to it.
N %i PMT PV FV
Enter 2 400
Solve for 318.88
SPREADSHEET STRATEGIES
How to Calculate Present Values with Multiple Future
Cash Flows Using a Spreadsheet
Just as we did in our previous chapter, we can set up a basic spreadsheet to
calculate the present values of the individual cash flows as follows. Notice that
we have simply calculated the present values one at a time and added them up:
1 2 3 4 5 6 7 8 9
10
11
12
13
14
15
16
17
18
19
20
21
22
AB C D E
Whatisthepresentvalueof$200inoneyear,$400thenextyear,$600thenex tyear,and
$800thelastyearifthediscountrateis 12 percent?
Rate: 0.12
Year Cashflows Presentvalues Formulaused
1 $200 $178.57 =PV($B$7,A10,0,B10)
2 $400 $318.88 =PV($B$7,A11,0,B11)
3 $600 $427.07 =PV($B$7,A12,0,B12)
4 $800 $508.41 =PV($B$7,A13,0,B13)
TotalPV: $1,432.93 =SUM(C10:C13)
NoticethenegativesignsinsertedinthePVformulas.Thesejustmakethep resentvalueshave
positivesigns. Also,thediscountrateincellB7isenteredas$B$7(an"ab solute"reference)
becauseitisusedoverandover.Wecouldhavejustentered".12"instead,b utourapproachismore
flexible.
Using a spreadsheet to value multiple future cash flows