Finance Calculations

Question 1

Present Value Definition

Answer 1

PV has to do with the time value of $$
Value TODAY of a future cash inflow
PV = SMALLER amount than its FV
Higher PV BETTER

Question 2

Present Value Equation

Answer 2

PV=FV/(1+i)^n

Question 3

How is PV used?

Answer 3

Used to calculate NPV

For simple investment decisions

Question 4

How do we use Net Present Value?

Answer 4

To find Amount project will return in today’s PV

Question 5

What is NPV?

Answer 5

Sum of inflow and outflow in PV terms

Question 6

How do you calculate NPV?

Answer 6

NPV = SUM[FV/1+i)^n]
FV = Future Cash Inflow (+) and Outflow (-)

Question 7

NPV TRICK

Answer 7

Which Project to Select?
      Duration      NPV
A)    4 Yr            $40K
B)    3 Yr            $45K
C)    6 Yr            $62K

No calculation is needed

Time value of $$ is ALREADY accounted for

Question 8

Benefit Cost Ratio

Answer 8

Gives you relative value
Higher the better
< 1 : Losing $

Question 9

Payback Period

Answer 9

Time req’d to get investment back
Usually calculated without time value of $$
SMALLER the better
Cost Benefit Ratio = 1

Question 10

Internal Rate of Return

Answer 10

Higher is Better

Question 11

Internal Rate of Return

Answer 11

Computes the rate (i) which equalizes the cash inflow and outflow

Equalizes PV and FV based on (i)