Fundamentals of Financial Management
Chapter 2
Opportunity cost of capital – rate of return expected to be received from alternate investments forgone.
NPV – Present value of cash flows less the cost of acquiring the asset acquire assets with positive NPV, positive NPV = good project
Rate of Return = profit/cost or investment (good investments have higher rate of return than opportunity cost)
Higher discount rate ( lower discount factor (lower NPV
Investment Decision Rules:
1. accept if positive NPV 2. accept w rate of return > opp cost or hurdle rule
PV = C1* [1/(1+r)] = Discount factor * cash flow (calc: usually -PV )
Discount factor (DCF) = 1/(1+r) or PV/FV ** will be < 1 **
NPV = C1 + C1* [1/(1+r)]
If PV of $1 received n years from today at an interest rate of r=.270 then what is the future value of $1 invested today at an interest rate of r% for n years? FV = 1/(.270) = 3.71
retire in 30 yrs, wants to accumulate 1 mill before. I =12%, how much should he put into fun each year? (n=30, FV=1mill, I=12%, PV=0, PMT=?) = 4143.66
retire in 30 yrs., wants to accum 1 mill before. I=12%/yr. pmt monthly with monthly cmpd interest. (n=20*12=360; r=12%/12=1%monthly; FV=1mill; PV=0; PMT=?) =286.13
Chapter 3
FV = PV (1+r)t ; PV = FV * DCF
Perpetuity – a stream of cash flows with fixed payments each year lasting forever. PV = C/r r = C/PV
Growing Perpetuity – a perpetuity with a constant growth rate (g) ** r must be greater than g **
Annuity – a stream of cash flows with a definite end Ordinary annuity – payments at the end of the year Annuity due – payments at the beginning of the year PV of annuity due = PV of an ordinary annuity * (1+ r)
Simple interest – interest earned only on principal (same amt every period)
Compound interest – earn interest on principal and interest already earned. Compounding – “m” times per year (1 + r/m)m As “m” approaches infinity it is continuous compounding. Formula for
Opportunity cost of capital – rate of return expected to be received from alternate investments forgone.
NPV – Present value of cash flows less the cost of acquiring the asset acquire assets with positive NPV, positive NPV = good project
Rate of Return = profit/cost or investment (good investments have higher rate of return than opportunity cost)
Higher discount rate ( lower discount factor (lower NPV
Investment Decision Rules:
1. accept if positive NPV 2. accept w rate of return > opp cost or hurdle rule
PV = C1* [1/(1+r)] = Discount factor * cash flow (calc: usually -PV )
Discount factor (DCF) = 1/(1+r) or PV/FV ** will be < 1 **
NPV = C1 + C1* [1/(1+r)]
If PV of $1 received n years from today at an interest rate of r=.270 then what is the future value of $1 invested today at an interest rate of r% for n years? FV = 1/(.270) = 3.71
retire in 30 yrs, wants to accumulate 1 mill before. I =12%, how much should he put into fun each year? (n=30, FV=1mill, I=12%, PV=0, PMT=?) = 4143.66
retire in 30 yrs., wants to accum 1 mill before. I=12%/yr. pmt monthly with monthly cmpd interest. (n=20*12=360; r=12%/12=1%monthly; FV=1mill; PV=0; PMT=?) =286.13
Chapter 3
FV = PV (1+r)t ; PV = FV * DCF
Perpetuity – a stream of cash flows with fixed payments each year lasting forever. PV = C/r r = C/PV
Growing Perpetuity – a perpetuity with a constant growth rate (g) ** r must be greater than g **
Annuity – a stream of cash flows with a definite end Ordinary annuity – payments at the end of the year Annuity due – payments at the beginning of the year PV of annuity due = PV of an ordinary annuity * (1+ r)
Simple interest – interest earned only on principal (same amt every period)
Compound interest – earn interest on principal and interest already earned. Compounding – “m” times per year (1 + r/m)m As “m” approaches infinity it is continuous compounding. Formula for