Week 1 - Lecture 2 Flashcards
(15 cards)
Return on investment is always a…
percentage in a period
e.g 3% per day
What is the formula for return on investment?
k = Pt - Ps
———— x 100
Ps
For return on investment formula, what does each letter represent?
k = rate of return on investment
P = price
t = current time (e.g this week, month, year)
s = previous time (e.g last week, month, year)
Cost of capital is always a…
percentage
How do we make periodic rates comparable?
Analyzation (Conversion of a periodic rate to an annual rate)
What is the conversion formula?
(1-kp) = (1+ka)^p
For the conversion formula, what does each letter represent?
kp = periodic rate
ka = annual rate
p = period in terms of a year
What formula can we use to find current price if we know rate of return and last year’s price?
Pt = (1+k) x Ps
What formula can we use to find future price (compound growth) if we know rate of return and a previous year’s price?
Pt = (1+k) ^ x Ps
Where the difference in the number of years between Pt and Ps is the index
What formula do we use if we want to know a present value and we know a future value?
Po = Pt / (1+k)^t
What is the process of calculating P0 called?
Discounting future value to have a present value
What is present value negatively correlated with?
Periodic rate and time period
What is the formula to prove present values negative correlation?
Po = FV / (1+k)^t
What can an interest rate be used as?
A discount rate
How do you find the net present value?
1) establish future cash flows of a project
2) discount them into present values (discount rate)
3) sum them up to find the NPV
