Lecture 15

Question 1

Core principal – time value of money 

Answer 1

Money is not worth more than money later due to – risk, inflation, opportunity cost, liquidity preference 

Question 2

Compounding definition and formula

Answer 2

Future value (FV) grows interest is added on top of interest
FV = PV x (1+r)^n

Question 3

Discounting definition and formula

Answer 3

Converts future cash flows to their value today
PV = FV / (1+r)^n

Question 4

Unequal cash flows definition and formulas

Answer 4

Discount each cash flow individually to get their net present value (NPV)
NPV = sum of ((CF t ) / (1 +r)t)

Question 5

Annuity (PV) formula and use

Answer 5

Fixed payments for set years 

Question 6

Perpetuity use and formulas

Answer 6

PV = p/r
Payments that go on forever

Question 7

Growing perpetuity use and formula

Answer 7

PV = p/(r-g)
Perpetuity with growing payments 

Question 8

How does compounding differ from simple interest?

Answer 8

Compounding adds interest on previous interest, simple interest doesn’t 

Question 9

What does the PV of growing perpetuity depend on?

Answer 9

Initial payment (P), interest rate (R), and growth rate (G) 

Question 10

What is liquidity preference? 

Answer 10

Preference to hold onto cash now rather than illiquid assets 

Question 11

When is discounting used?

Answer 11

To evaluate present value of future cash flows

Question 12

What financial tool uses all these time value formulas? 

Answer 12

Investment appraisal (net present value, IRR, etc)