DCF Flashcards
How would you convert a future value to a present value?
Present value x interest multiple
What does the discount rate reflect?
Time, risk and inflation
How would you calculate the present value/year 0 equivalent?
Future value/interest multiple
What is a present value?
An year euro equivalent of a future value (I.e. discounted value)
What is the NET present value?
The sum of all discounted future cash flow minus any initial investment
What information do you need to know in order to decide which cash flow/sum to choose?
A discount rate which indicates your time preference between cash now and cash in the future
Could translate present cash into future cash or vice versa
What is the formula for calculating the net present value?
-C0 + (C1/(1+r)) + (C2/(1+r)^2) + …
Would a firm go ahead with a project if the NPV is negative?
No, NPV should be positive
EXAMPLE QUESTION:
A piece of land cots €85,000. Next year the land will be worth €9,000, a sure €6,000 gain. Given tat the guaranteed interest rate in the bank is 10%, should you undertake the investment?
NO, NPV IS NEGATIVE
-85,000 + (91,000/1.1)
= -2,273
If capital is not limited, what should you do with projects where NPV is more than or equal to 0?
Accept them
If capital is rationed, what should you do?
Rank projects by NPV
What is fundamental to valuation?
NPV
What can the value of the firm be seen as?
The discounted sum of it’s future cash flows
What is compound interest?
Interest paid on top of previously accumulated interest
E.g if interest is 10%, 1.1^2 would be the compound interest multiple over 2 periods, 1.1^3 is over 3 period etc.
What is the generalised formula for cash flow future value?
FV t = C0 x (1+r)^t
Or
FV t = IM^t x PV
