Topic 4 - The Time Value of Money Flashcards
(9 cards)
What is Future Value (FV)
The amount that an investment is worth after one or more periods of time
FV = PV(1 + r)
PV - Present Value
r - interest rate
What is the difference between Simple interest and Compound interest
Simple - interest earned only on the capital invested
Compound - interest earned on capital initially invested and on interest earned in previous periods
How do you calculate the Future value of a multiple period investment
FV = PV(1 + r)^t
What is the formula for calculating the present value (PV) in discounted cash flow analysis
PV = FV / (1 + r)^t
How do you calculate the PV and FV of multiple cash flows
FV = PV(1 + r)^t-1 + PV(1 + r)^t-2 …
PV = FV/(1 + r)^1 + FC/(1 + r)^2 …
What is an Annuity
A series of cash flows of the same amount at the end of each period for a fixed number of periods
How do you calculate the FV and PV of an annuity
FV of an annuity = C [(1 + r)^t - 1 / r]
PV of an annuity = C [1/r - 1/r(1 + r)^t]
What is a Perpetuity
A stream of equal cash flows that continues forever, with no end point. It assumes payments occur at regular intervals indefinitely
How do you calculate the PV of a perpetuity, adn a growing perpetuity
PV of perpetuity = C / r
PV of growing perpetuity = C / r - g
