chapt 9 Flashcards
(37 cards)
time value of money depends on two things
AMOUNT
THE TIME AT WHICH IT IS RECEIVED
future value formula
FV = ππ β π + π«^t
future value def
value of a single cash flow at some point later on a
timeline
present value def
value of a single cash flow at some point earlier on a
timeline
r =
rate of return, discount rate, int rate, required rate of return, cost of capital
t =
number of periods
simple int
β interest earned on principal only
compund int
β interest earned on both
original principal and all reinvested interest
when it says today in question it is
future value formula
compunding effects increase whenβ¦
number of periods increase
how much βyou need to invest nowβ or βhow much am i willing to pay nowβ is
present val formula
present val formula =
PV = FV x 1/ (1+r)^t
longer or shorter time period gives you lower present value
longer time period
higher or lower r value gives you small present value?
higher r value
compund avg growth rate (CAGR)
to find r another name
discount rate formula is finding r =
r = (FV/ PV ) ^ 1/t -1
multiple cash flows : how to solve compunding
find value at a point in time and coumpound result to find future value
multiple cash flows : how to solve discounting
find their value at any
other point in time by simply discounting your result to find
a present value
compounding fomrula is same as future val =
FV = PV x (1 + r)^t
discounting formula same as present val =
PV = FV x 1 / (1+r)^t
basic economic theory on buying something is
if the (marginal) value
that it provides exceeds its (marginal) cost.
as a financial manager
considering an investment, how do you know it
will add value?
amount and timing of
future cash flows provided by investment
Calculate the value of those cash flows
Compare to the cost
lumpy cash flows
They do note occur at regular intervals
not constant
patterned cash flows
Occur at regular intervals
* Are equal values
