10. Present Values & Discounting

Present Value

The current worth of a future cash flow, discounted at a specific interest rate.

Future Value

The value of an investment after it has earned interest over a period of time.

Net Present Value (NPV)

The sum of the present values of all cash flows from an investment, both incoming and outgoing.

Internal Rate of Return (IRR)

The discount rate that makes the net present value of a project zero.

Discount Rate

The interest rate used to discount future cash flows to their present values.

Discount Factor

The factor used to convert a future cash flow into its present value, calculated as 1 / (1 + r).

Opportunity Cost of Time/Capital

The potential returns lost when money is tied up in an investment rather than being available for other opportunities.

Compound Interest

Interest calculated on the initial principal and also on the accumulated interest of previous periods.

Simple Interest

Interest calculated only on the principal amount, not on the accumulated interest.

Cash Flow Stream (CFS)

A sequence of cash flows over time, often used in investment analysis.

Arbitrage Profit

The profit made from buying and selling an asset based on price discrepancies in different markets.

No Arbitrage Condition

A situation where the price of an asset is equal to its present value, leading to no possibility of riskless profit.

Patience Factor

A measure of how much weight an individual places on future cash flows relative to present cash flows.

Investment Decisions

Choices made regarding where to allocate resources with the expectation of generating a return.