TVM, NPV, etc Flashcards
Covers Time Value of Money, Net Present Value, etc
What is the Time Value of Money? (TMV)
Determines the value of money, at a point or over a period of time, at a given rate of interest
5 variables of TVM
N - period
I/YR - interest per year
PV - present value
PMT - Payment
FV - Future Value
4 general steps to TVM
- Start with a timeline
- write down the TVM variables
- Clear all registers in calculator
- Populate the TVM variables in calculator
What is Net Present Value (NPV)?
The sum of all present values of all the cash inflows minus the sum of the present values of all the cash outflows at an assumed interest rate.
What 4 things do you need to know before you can calculate NPV?
- Amount of initial capital expenditure (if any)
- Expected life of acquired asset
- Anticipated future cash flows (in and out)
- Appropriate interest rate
“End Mode” Cash Flows
5 things
- Mortgage PMTs
- Automobile PMTs
- Commercial Loan PMTs
- Continuing investment contributions (unless otherwise specified)
- Ordinary annuity (simple annuity/Annuity immediate)
“Begin Mode” Cash Flows
4 things
- College tuition
- Retirement income PMTs
- Life insurance PMTs
- Annuity due
What do Serial Payment Calculations do?
They calculate the amount of increasing payments (disbursements only) necessary to reach a future value that increases each year because of inflation.
What does a Serial Present Value Calculation do?
It determines the present value of a stream of cash flow. (receipts or disbursements)
(1.ROR/1.ROI) - 1 x 100 [use for I/YR]
What does a Target Inflation Calculation do?
It calculates the impact of inflation on a singular number.
(Simple TVM)
What does a Blended Inflation Target Calculation do?
Determines the future value of a singular number stated in real dollars
(Blending inflation and rate of return of investment)
(1.ROR/1.ROI) - 1 x 100 [use for I/YR]
