Chapter 2 - How to calculate Present Value

Question 1

Future Value

Answer 1

FV= C(inicial) x (1+r)^t or FV = PV X (1+r)^t

Question 2

Present Value

Answer 2

PV = Ct / (1+r)^t    
PV = C1 / (1+r) + C2 / (1+r)^2 + C3 / (1+r)^3 + ... + Ct / (1+r)^t

Question 3

Discount Factor

Answer 3

DF = 1/(1+r)^t

Question 4

Net Present Value

Answer 4

NPV = C(inicial) + C1/(1+r) , and is also the Present Value less the investment
NPV = C(inicial) + PV , the initial cash flow is negative

Question 5

Return

Answer 5

R= profit / investment

Question 6

Present Value - Perpetuity

Answer 6

PV = C/r

Question 7

Present Value - Growing Perpetuities

Answer 7

PV = C/(r-g)

Question 8

Present Value - Annuity

Answer 8

PV = C/r x [1-(1/(1+r)^t)]

Question 9

Present Value - Growing Annuities

Answer 9

PV = C/(r-g) x [1- (1+g)^t/(1+r)^t]

Question 10

Why are cash flows discounted?

Answer 10

For two simple reasons: because (1) a dollar today is worth more than a dollar tomorrow and (2) a safe dollar is worth more than a risky one. Formulas for PV and the NPV are numerical expressions of these ideas.

Question 11

Develop discount rate (r)

Answer 11

Is determined by rates of returns prevailing in capital markets. If the future cash flow is absolutely safe, the the discount rate is the interest rate on safe securities such as U.S. government debt. In the future cash flow is uncertain, then the expected cash flow should be discounted at the expected rate of return offered by equivalent-risk securities.