Topic 2: Time Value of Money in Multi-Period Assets Flashcards
(19 cards)
Negative cash flows are
Costs/outflows
Positive cash flows are
benefits/inflows
Formula for working out cashflows in more than one time period?
What is compounding?
The process of moving a cashflow forward in time
What is compound interest?
Investing money for multiple periods, interest is earned on both the original deposit and the interest earned in previous periods
Formula for Present value of a single cash flow Cn in n periods time (discounting)
What is discounting?
Essentially find the amount which, if invested today at the current interest rate, would give an identical cash flow Cn in n periods time
Formula for valuing a stream of cash flows
Formula for finding the future value of a cash flow stream
It is just the sum of the FVs of the individual cash flows OR
What is a Perpetuity?
A constant cash flow that will occur at regular intervals forever
WE ALSO ASSUME COUPONS START AT TIME 1
Present Value of a Perpetuity
What is an Annuity?
A constant cash flow that will occur at regular intervals for a finite number of N periods
Present value of a annuity paying C for N periods
What is a Growing Perpetuity?
A stream of cash flows at regular intervals that grow at a constant rate g.
Where g<r otherwise payments will grow faster than they are being discounted and so the PV would be infinite
Present value of a growing perpetuity
What is a Growing Annuity?
A cash flow that will occur at regular intervals for a finite number of N periods and that increases at a constant rate g
What is the Present Value of a Growing Annuity?
What is the internal Rate of Return (IRR)?
The interest rate that sets the net present value of the cash flows equal to zero
How to work out the IRR?
Setting the expression for the NPV equal to zero and rearranging
