Assumed Knowledge Flashcards
1
Q
What is the formula for compounding?
A
Formula for compounding:
F = P. (1 + r) n
Where: F = Future value P = Initial investment (present value) r = Interest rate (expressed as a decimal) n = Number of time periods
2
Q
What is the formula for discounting?
A
The rearrangement of the original formula for compounding to make P (Present value) the subject of the equation.
P = F / (1+r)n
3
Q
What is also the formula for present value?
A
➢ Present value (PV) = Future value (FV) x Discount factor (DF)
Where:
➢ Discount factor = 1 / (1+ r)n
AKA the discounting formula
PV=Discounting formula
4
Q
What is the discounting factor formula
A
Discount factor = 1 / (1+ r)n
5
Q
What is the formula for perpetuity?
A
Present value of the perpetuity=
PV= CF/r
r= Discount rate
6
Q
What does a discount rate do?
A
It simply takes us back one period
