Sports: Debt and Cash Flows Essay

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Chapter 6 is about cash flow valuation. In contrast to previous chapters we now consider situations in which there are multiple cash flows. Solving future value problems with multiple cash flows involves a simple process. Many situations in business call for computing the present value of a series of expected future cash flows. This could be to determine the market value of a security or business or to decide whether a capital investment should be made. The process is similar to determining the future value of multiple cash flows. In section 6.2 it discuss level of cash flows: annuities and perpetuities. There are many situations in which both businesses and individuals would be faced with either receiving or paying a constant amount for a length of period. When a firm faces a stream of constant payments on a bank loan for a period of time, we call that stream of cash flows an annuity. Individual investors may make constant payments on their home or car loans, or invest a fixed amount year after year to save for their retirement. There are financial contract that calls for equally spaced and level cash flows over a finite number of periods. There are cash flow payments that continue forever and Constant cash flows that occur at the end of each period. Future value annuity calculations usually involve finding what a savings or an investment activity is worth at some point in the future. This could be saving periodically for a vacation, car, or house, or even retirement. Companies and other investments are worth the "present value" of all the cash you'll earn from them in the future. You can't just add up all that cash because a dollar tomorrow or ten years from now is worth less than a dollar you have in your pocket. So you need to "discount" the future cash flows by an acceptable rate of interest. There are three types of loans that are described in this chapter they are pure loans which is the simplest of loans, discount loans, interest loans, and amortized loans. Amortization refers to the way the borrowed amount is paid down over the life of the loan. The monthly loan payment is structured so that each month a portion of the principal is paid off
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