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CHAPTER 4: Discounted Cash Flow Valuation
Finance
19
Finance
Graduate
11/13/2011

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Term
future value (FV) or compound value
Definition
the value of a sum after investing over one or more periods
Term
Net Present Value of Investment (NPV)
Definition
NPV = PV - Cost
Term
compounding
Definition
the process of leaving the money in the financial market and lending it for another year
Term
simple interest
Definition
r * T
Term
compound interest
Definition
r^T
Term
Future Value of an Investment
Definition
FV = C0 * (1+r)^T
Term
discounting
Definition
the process of calculating the present value of a future cash flow/opposite of compounding
Term
present value factor
Definition
factor used to calculate the present value for a future cash flow
Term
Present Value of an Investment
Definition
PV = CT / (1+r)^T
Term
NPV of a T-period project
Definition
NPV = -C0 + ∑Ti=0 Ci/(1+r)i
Term
stated annual interest rate
Definition
annual interest rate without consideration of compounding. Also called annual percentage rate (APR)
Term
Future Value with Compounding
Definition
FV = C0 (1 + r/m)mt
Term
Continuous Compounding
Definition

compound every infinitesimal instant

 

C0 x ert

 

C0 = initial investment

r = stated annual interest rate

T = number of years

e = 2.718

Term
perpetuity
Definition

constant stream of cash flows without end

 

C

r

Term
growing perpetuity
Definition

cash flow stream that continually rises

 

PV =   C

           r - g

 

r= appropriate discount rate

g = rate of growth per period

C = cash flow to be received one period hence

Term
Three important points concerning the growing perpetuity formula
Definition
  1. The numerator
  2. The discount rate and the growth rate
  3. The timing assumption
Term
annuity
Definition
level stream of regular payments that lasts for a fixed number of periods. One of the most common kinds of financial instruments (pensions, leases, mortgages)
Term
Formula for Present Value of Annuity
Definition

PV = C[ 1 - __1__   ]

         ___(1 + r)T

          r

Term
growing annuity
Definition
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