Net Present Value and Time Value of Money

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7 Terms

Time Value of Money

Receiving one $ now is worth more than a $ in the future.
This is due to the potential earning capacity of money, which can earn interest over time. Therefore, money available today can generate returns, making it more valuable than the same amount in the future.
If not invested it will erode over time due to inflation.

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Discounting

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Compounding

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Simple vs Compound Interest

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Net Present Value (NPV)

NPV is the difference between the present value of cash inflows and outflows over time, indicating the profitability of an investment.

Useful for comparing projects with different cash flow patterns lifespans and risk profiles.

<p>NPV is the difference between the present value of cash inflows and outflows over time, indicating the profitability of an investment.<br><br>Useful for comparing projects with different cash flow patterns lifespans and risk profiles. </p>

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NPV Eqn

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Perpetuity

A cash flow which continues into the future indefinitely.

example includes: Gov. Bonds

<p>A cash flow which continues into the future indefinitely. <br><br>example includes: Gov. Bonds</p>

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