Week 7- Discounted Cash Flow Flashcards
How can you work out what the future value of money now would be in the future i.e. a years time?
Using the interest rate
Describe future value
The result of applying an interest multiple to a present value
Describe present value
The sum you start off with
Describe interest multiple
One plus the interest rate
How do you calculate conventional future value?
= Interest multiple x Cash flow in year 0
How do you calculate future value?
= Interest multiple x Present value
Describe present value
Any year zero equivalent of future value, i.e. its discounted value
Describe net present value
The sum of all discounted future cash flow minus any initial investment
How do you calculate net present value?
= (Cash flow in year 0 + Expected cash flow one year ahead ) / Interest multiple
Would a positive or negative net present value cause a firm to go ahead with a project?
Positive
What do you do if capital is not limited?
Accept all projects where net present value is greater than or equal to 0
What do you do if capital is rationed?
Rank projects by net present value
Describe compound interest
Interest paid on top of previously accumulated interest
How do you calculate future value in T years?
Compound interest multiple x Present value
How do you find year 0 equivalent of a future cash flow?
Divide the cash flow by the appropriate compound interest multiple
