Chapter 5 Flashcards
What is the present value?
the current value of future cash flows discounted at the appropriate discount rate. This is the value at the beginning of the investment (not necessarily the present as in today)
What is the future value?
Future Value – the amount an investment is worth after one or more periods. This is the value at the end of the investment (not necessarily in the future)
What is compounding?
The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings
Watch out!
PV and FV need to have a different sign at any time in the excel sheet
What is discounting?
Discounting translates cash flows to be received in the future into their value today. It is a way of knowing what the true value of something is to you today that you are not going to receive until sometime in the future.
