what is finance and the time value of money Flashcards
what is finance
refers to all money related decisions consumers, producers and governments make
what is the difference between accounting and finance
accounting : focuses on the collection and analysis of financial information
- accountant seeks to analyse financial data to make a report
finance : concerned with the implications that arise from employing various money management strategies
- a financial expert synthesises the information to generate an actionable recommendation
why is a dollar today worth more than it is tmr
- you can invest the dollar and earn a positive rate of interest
- the purchasing power of the dollar can change overtime due to inflation
- money expected in the future is in general uncertain
what is simple interest
pays interest on the original rincipal
what is compound interest
interest that pays on the original principal but also o accumulated interest
what does compounding calculate
the future sum of money invested today
what is a present value
the value today of a cash flow received in t years time
what is a perpetuity
a stream of fixed cash flows that is received at the end of every year from now till infinity
what is net present value
the sum of the present values of all the cash flows generated by the project to the firm in each of the next t years, less the sum of the present values of the cash investments associated
what is the net present value (NPV) rule
- if the NPV is positive, the project should be accepted - it generates more receipts (cash inflows) than cash investments (payments) = net contribution
- if NPV negative, the project should be rejected
- If NPV is 0, the firm can either accept or reject the project
What is an annuity
a financial project or product that provides a series of equal cash flows made at regular intervals
what is growing perpetuity
a perpetual cash flow stream that grows at a constant rate over time
