Chapter 4&5 Flashcards
Time Value of Money
it is extremely important for a financial manager to be able to predict the future value of cash flows
Determinants of Time Value of Money
amount of cash on hand today
Present Value and its Importance
is the amount of cash that is on hand today in order to determine the value of the cash in the future
Rate of Growth
Another determinant of future value is that rate at which the cash amount grows
Number or Periods
the third determinant of Future Value is the number if periods on which cash is invested
Importance of Future Value Calculation
it gives the financial manager insight into cash forecasting to determine the different cash flows that may be needed in the future
Future Value and ROI
the higher the ROI, the more benefit that a certain investment will have for the company overall
Future Value
the amount of money an investment will grow over a period of time at a given interest rate
Compounding Interest
refers to the process of leaving money and any accumulated interest in an investment for more than one period
Simple Interest
the interest is not reinvested
Discount Rate
the rate used to calculate the present value of future cash flows
Discounted Cash Flow Valuation
calculating present value of a future cash flow to determine its value today
Multiple Cash Flows- Present Value
can be accomplished by 1) discount back one year at a time and 2) calculate the Present Values individually and sum them
Multiple Cash Flows and the Business
proves a more comprehensive picture of a company’s financial health by considering different course and timing of cash flows and outflows, allowing for a better understanding of its ability to meet obligations, make investments, and manage potential risks across various scenarios
Annuities and Cash Flows
a company encounters a situation when multiple cash flows are occurring at the same amount over a fixed period of time
Effective Annual Rate (EAR)
the interest rate expressed as if it were compounded once per year
