5-Final Flashcards
(14 cards)
Future Value
this tells you how much a certain amount of money today will be worth in the future if you invest it and earn interest
Present Value
this tells you how much a future amount of money is worth today. It works like reverse interest
Present Value of money calculation
the amount of money you have now, or the value today of money you will receive in the future
Future Value of money calculation
the amount of money you’ll have in the future, after earning interest in returning overtime
Period of money calculation
this is how many time units the money will be invested in or saved for. It tells how long the money grows or is discounted
Discount/Interest Rate of money calculations
The rate at which money earns interest or grows over time. It can also be thought of as the “cost of waiting” for money
Simple Interest
you earn interest only in the original amount, the interest is the same every period
Compounding Interest
you earn interest on the original amount plus any interest already earned, the interest grows faster because it’s added to the balance each time
Net Present Value
adds up the present value of all future cash flows
helps decide if a project is worth doing. If NPV is positive, the project adds value
Internal Rate of Return
the interest rate that makes the NPV of cash flows equal to zero
helps compare different investments. Higher IRR usually means a better return
Payback Period
how long it takes to recover the initial investment from the cash flow
shows how quickly money is recovered. Good for managing risk and liquidity
Discount Payback Period
like the payback period, but it accounts for the time value of money
more accurate than regular payback, especially for long-term projects
Why Methodologies matter to Financial Manager
help choose the best projects or investments, allow comparison between options with different cash flow patterns, ensure decisions are based on value over time, not just totals, manage risk, timing, and returns more effectively
Importance of Timing of Cash Flows
money now is worth more than money later, early cash inflows reduce risk, helps with planning and budgeting, affect value calculations
