Present Value Flashcards
Future Value Definition
Value of an asset’s cash
flow in the specific future
date, expressed in terms of
pounds/dollars in the same
specific future date.
Present Value Definition
Value of assets cash
flow expressed in
today’s dollar value
Present Value Equation
period T, return on investment r : PV = $Ct/(1+r)^T
Discount Factor Equation
DF = 1/ (1+r)^T
Present value expressed in terms of future value
PV = FV / (1+r)^T
Net Present Value equation
C0 + C1/(1+r)
risk and present value
An increase in interest rates will typically reduce the
NPV of an investment, higher risk means higher discounting effect so cost of doing business is high
rate of return rule
accept investments that offer rates of return in excess of their opportunity cost of capital
internal rate of return
discount rate where NPV = 0
internal rate of return rule
Invest in any project offering a rate of return that is higher
than the opportunity cost of capital
rate of return equation
= (payoff / investment) - 1
perpetuity defintion
Financial concept in which a cash
flow is theoretically received forever
annuity defintion
An asset that pays a fixed sum each year for a specified number of years
PV of an annuity equation
= C x (1/r - 1/r(1+r)^t)
PV Annuity Factor (PVAF)
The present value
of $1 a year for each of t years
PV Annuity Factor (PVAF) equation
1/r - 1/r(1+r)^t
Future Value of an Annuity
The future value of an
asset that pays a fixed sum each year for a specified
number of years
Future Value of an Annuity equation
= C * ((1+r)^t -1)/r)
Annuity due
Level stream of cash flows starting immediately
PV annuity due equation
PV annuity * (1+ r)
FV annuity due equation
= FV annuity * (1+r)
present value of growing perpetuity equation
PV0 = C1 / r-g where g = the annual growth rate of cash flow
Annual Percentage Rate
Interest rate that
is annualized using simple interest
Effective Annual Interest Rate
Interest
rate that is annualized using compound
interest
APR equation
MR * 12 where MR = monthly interest rate
EAR equation
(1 + MR)^12 - 1
