Intermediate Corporate Finance: Time Value of Money & Inflation

Time Value of Money

The concept that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

Discounted Cash Flow (DCF)

The primary valuation method that determines the value of an investment based on its expected future cash flows, adjusted for the time value of money.

Annuities

Financial products that provide a series of cash flows at regular intervals for a specified period.

Perpetuities

Financial instruments that provide constant cash flows indefinitely.

Nominal Rate

The interest rate that includes the effect of inflation.

Real Rate

The interest rate that excludes the effect of inflation.

Fisher's Equation

An equation that describes the relationship between nominal interest rates, real interest rates, and inflation.

Cash Flows (CFs)

The total amount of money being transferred into and out of a business over a period.

Net Present Value (NPV)

The sum of the present values of cash flows, which may include both inflows and outflows.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Present Value (PV)

The current worth of a future sum of money or cash flows given a specified rate of return.

Future Value (FV)

The value of a current asset at a specified date in the future based on an assumed rate of growth.

Weighted Average Cost of Capital (WACC)

The average rate of return a company is expected to pay its security holders to finance its assets.

Growing Perpetuity

A perpetuity where cash flows increase at a constant rate indefinitely.

Annuity Due

An annuity for which payments are made at the beginning of each period.

Growing Annuity

An annuity where payments increase at a certain rate over time.

Cash Flow Patterns

The regularity or irregularity in the timing and amount of cash flows.

Opportunity Cost

The potential benefit that is missed out on when one alternative is chosen over another.

Inflation Rate

The percentage change in the price level of goods and services over a period.

Lump Sum Cash Flow

A single payment made at a particular time, as opposed to a series of payments.

Cash Flow Statement

A financial statement that provides aggregate data regarding all cash inflows and outflows a company receives.

Future Value of a Cash Flow Formula Equation

FV = PV*(1+r)^n

Present value of a Cash Flow Formula Equation

PV = FV/(1+r)^n