Lecture 3 (Chapter 4)

Question 1

3 rule for time traveling with cashflows

Answer 1

1. Only values / cashflows that occur at the same time can be compared or combined.
   For this the values must be in the same units or moved in time.
2. Move forward in time = compound
   Compound interest = ränta på ränta
   FV = C * (1+r)^n
3. Move backward in time = discount
   PV = C / (1+r)^n

Question 2

What is the easiest way to know if you should do a investment?

Answer 2

Draw a timeline from year 0 to year n (n=years in the question)

Question 3

1. Calculate the present value of cash flow stream? (kassaflödet)
2. Calculate the future value of cash flow stream?

Answer 3

1. PVn = C / (1+r)^n
2. FVn = PVn * (1+r)^n

Question 4

Two types of cash flow streams:

Answer 4

Perpetuities and annuities

Question 5

Perpetuities?

Answer 5

A stream of cash flow that occurs in regular intervals and lasts forever.

En ström av kassaflöden som inträffar under regelbundna intervall och för evigt.

PV = C / r

Question 6

Annuities?

Answer 6

A stream of N equal cash flows paid at regular intervals.

En ström av N antal likvärdiga kassaflöden vid regelbundna intervall.

Question 7

What’s the difference between annuities and perpetuities?

Answer 7

Annuity ends after a fixed number of payments while perpetuities lasts forever.

Question 8

Betalning på 1 miljon varje år i 20 år, interest rate 5%. Vad ska man tänka på?

Answer 8

Sätt 1 miljon som 1.
Om betalningen börjar idag använd 19 år som n.

Question 9

What is a growing perpetuity?
What is a growing annuity?

Answer 9

A increasing cash flow stream of C which will last forever.
A stream of N growing cash flows paid at regular intervals.

Question 10

IRR?

Answer 10

Internal Rate of Return (Internränta)
The return of an investment that makes present values of cashflow = 0.

Ett sätt att mäta förväntade lönsamheten i en potentiell investering.

Question 11

Vad är IRR lätt att lösa för?

Answer 11

Easy to solve for perpetuities and harder to solve for annuities.