In it, we explained a number of things about the time value of money, including these:įor a given rate of return, we can determine the value at some point in the future of an investment made today by calculating the future value of that investment. This chapter has introduced you to the basic principles of present value and discounted cash flow valuation. Before going on, therefore, you might want to do some of the problems that follow.
#VANITY DESK DECOR HOW TO#
For example, the next two chapters show how to value bonds and stocks using an extension of the techniques presented in this chapter. As a result, the DCF approach is broadly applicable and widely used in practice. The reason for this is that most investments, whether they involve real assets or financial assets, can be analyzed using the discounted cash flow (DCF) approach. The principles developed in this chapter will figure prominently in the chapters to come. The process of providing for a loan to be paid off gradually is called amortizing the loan, and we discussed how amortization schedules are prepared and interpreted. Where m is the number of times during the year the money is compounded or, equivalently, the number of payments during the year. The relationship between a quoted rate, such as an annual percentage rate (APR), and an effective annual rate (EAR) is given by: For financial decisions, it is important that any rates being compared be first converted to effective rates.
Interest rates can be quoted in a variety of ways.
#VANITY DESK DECOR SERIES#
Both approaches are straightforward extensions of our earlier analysis of single cash flows.Ī series of constant cash flows that arrive or are paid at the end of each period is called an ordinary annuity, and we described some useful shortcuts for determining the present and future values of annuities. There are two ways of calculating present and future values when there are multiple cash flows. This chapter rounded out your understanding of fundamental concepts related to the time value of money and discounted cash flow valuation. These lectures cover discounting cash flow valuation, including present value of multiple cash flow, present value of ordinary annuity and present value of single payment.
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