Chapter 1 Flashcards
What is present value?
The value of a dollar today
What is future value?
The value of a dollar tomorrow
Present value, future value formula?
PV0 = FVt / (1+r)^t
Other words for present value?
Fair value, market value, price of bond stock, and net present value.
Other word for rate of return?
Discount rate, required rate of return, cost of capital, cost of equity, cost of debt, WACC, and hurdle rate
What are the three categories of cash flows?
Series of uneven cash flows, perpetuity, annuity
Perpetuities are…
Constant and infinite
Annuities are…
Constant and finite
C (employment)=?
Annual contribution to pension plan
T (employment)=?
How long you’re employed
T (retirement)=?
How long you’re retired before death
C (retirement)=?
How much you can spend in retirement
Formula for how much you can spend during retirement?
PV0 = C (employment) / r * [1 - 1/(1+r)^T (employment)]
FVT (employment) = PV0 * (1+r)^T (employment)
PV0(retirement)=C(retirement) / r * [1 - 1/(1+r)^T (retirement)
How to calculate the work option?
PV0 = C1 / r -g * [1 - 1/(1+g / 1+r)^T]
How to calculate university option?
PV0 = C0 + C0 * (1+g)^1/r^1 + C0 * (1+g)^2/r^2+ C0 * (1+g)^3/r^3 + C4 / r -g * [1- 1/(1+g/1+r)^T /r4
