week 5 finance - time value of money

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  • Created by: jmf00632
  • Created on: 27-12-19 18:18
future value
the amount an invesmtnet is wort after 1 or more periods
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compunding
the process of accumalting interest on an inves,tnet over time to earn more interest
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interest on interest
interest earned on the reinvestment of previous interest payments
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compound interest
interest owned on both the initial principle and the interest reinvested from periods before
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simple interest
interest earned only on the original principle amount invested
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present value
the current value of future cash flows discounted at the appropriate discount rate
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discount rate
the rate used to calculate the present value of future cash flows
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dicounted cash flow valuation
calc the present value of a future cash flow to determine its value today
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Assume the total cost of a university education will be €290,000 when your child enters college in 18 years. You currently have €40,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s univer
we can either solve for fv or pv - personally i will solve for fv - you need to solve for r (use formula)
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At 6 per cent interest, how long does it take to double your money? To quadruple it?
with these type of questions we use trial and error - you put a value in t e.g. to get £1 to £2 it will take 12 years
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if asked about percentage increase
use the r formula
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if you are asked "what rate of return?"
they are asking for the interest rate so you have to find r
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if aksed about years....
you MAY have to take them away from eachother
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You expect to receive €10,000 at graduation in two years. You plan on investing it at 10 per cent until you have €75,000. How long will you have to wait from now?
USE TRIAL AND ERROR FOR THIS TYPE OF QUESTION - then once you have the answer remember to check if the answer says if you have to wait a while till you get the money - if so remember to add it on
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if asked why is a 10 year value worth less than a 1 year value:
because of the time value of money - then do workings to support this (pv)
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aside from the time value effect, what other factor influences how future cash flows are viewed?
risks and uncertainty - cash flows that occur further into the future are subject to a much higher degree of risk and uncertainty. It is very difficult, if not impossible, to accurately predict the future and so it is only a very rough approximation
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Other cards in this set

Card 2

Front

compunding

Back

the process of accumalting interest on an inves,tnet over time to earn more interest

Card 3

Front

interest on interest

Back

Preview of the front of card 3

Card 4

Front

compound interest

Back

Preview of the front of card 4

Card 5

Front

simple interest

Back

Preview of the front of card 5
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