3 Flashcards
Waarom is geld vaandaag meer waard dan in de toekomst
Opportunity cost
Inflation
Risk and uncertainty
Wat is compounding en wat is discounting
Compounding is the future value: The value of an investment at some time in the future
Discounting is the present value: The current value of a sum of money to be
received in the future
Hoe bereken je de future value
FV= PV(1+r)t
r= rate of return
t= years
Hoe bereken je de present value
PV= FV/(1+r)t
Wat is een perpetuity en hoe bereken je hem
A constant stream of cashflows
PV= C/r
Wat is een annuity en welke verschillende vormen heb je
A constant stream of money but it has an end
Ordinary annuity: cash flows occur at the end of each period (e.g., mortgage).
Annuities due: payment is due at the beginning of each period (e.g., lease)
Wat is de discount factor en hoe bereken je hem
DF= 1/(1+r)t
PV= FV*DF
Hoe bereken je de PV of future cash flows
PV= C1/(1+r) + C2/(1+r)2
Hoe bereken je de present value of an perpetual stream starting at the end of year 4
First calculate the perpetuity for year three which is one million
Then calculate the prsent value of the one million for the first three years with compounding
Wat zijn de Annual Percentage Rate (APR) Effective Annual Rate (EAR)
APR is the annual percentage rate that doesn’t take compounding into account
Ear does take compounding into account
k is how many times the interest is compounded
Wat is de Net Present Value
The difference between the present value of an investment’s cash inflows and the present value of its cash outflows
What is the NPV rule
Accept a project / an investment if NPV is positive and reject it if NPV is negative.
When faced with multiple projects, accept the project with the highest NPV
C0 + C1/(1+r)t+ C2/ (1+r)2
Wat zijn de nadelen van NPV
Cash flows are not so straightforward to estimate.
Coming up with the appropriate discount rate is also challenging
Wat is de IRR
The discount rate for the NPV to be 0
What is the IRR rule
Accept a project / an investment if IRR exceeds the required return.
When faced with multiple projects, accept the project with the highest IRR
Wat is opportunity cost
Cost of capital
Rate of return
Required return
Opportunity cost: the value of the best alternative
Cost of capital: the minimum return that a company must earn on its investments to satisfy its investors
Rate of return: the gain or loss made on an investment relative to the initial amount invested
Required return: minimum return that an investor expects to earn from an investment to compensate for its risk
Wat zijn nadelen van de IRR
Only works when the negatice cash flows comes before the positive cash flows
It can give multiple or no solutions
IRR doesn’t take the scale into account so it can give a bigger percentage score but the toal amount could be lower
Wat is payback period en hoe bereken je het en wanneer wordt het geaccepteerd en wat is een nadeel
The length of time it takes to recover the
initial investment
A project should be accepted if its payback
period is less than some specified cutoff
period
Ignores the time value of money, cash
flows after the cutoff date and risk
Wat is Book (Accounting) Rate of
Return en hoe bereken je hem en wat zijn de nadelen
ARR= Project’s average profits/ project’s average value of assets
Ignores time value of money and market
values;
No clear benchmark
Wanneer gebruik je PI en wat zijn de voor en nadelen
You use it when resources are limited
Easy to use when there are limited resources
Easy to understand and communicate
The set of projects taken must completely exhaust the available resources.
There is only one relevant resources constraint
