FIN 3

What is the difference between a nominal and a real cash flow?

• nominal cash flow = includes inflation

• real cash flow = measured in today’s purchasing power (constant price)

what is the difference between the nominal and the real interest rate?

• nominal rate = includes inflation

• real rate = measures the increase in purchasing power

What is the Fisher Equation?

What is the Present Value of a perpetuity (paid at the end of each month)?

The Present Value (PV) of a perpetuity is calculated using the formula: $PV = \frac{C}{r}$ where:

• $C$ is the cash flow per period,

• $r$ is the discount rate (interest rate).

What is the Present Value of a perpetuity (paid at the beginning of each period)?

The Present Value (PV) of a perpetuity paid at the beginning of each period is calculated using the formula: $PV = \frac{(1+r)\cdot C}{r} = C + \frac{C}{r}$ where:

• $C$ is the cash flow per period,

• $r$ is the discount rate (interest rate).

What is the Present Value of a perpetuity (paid at the end of each month)?

The Present Value (PV) of a perpetuity is calculated using the formula: $PV = \frac{C}{r}$ where:

• $C$ is the cash flow per period,

• $r$ is the discount rate (interest rate).

What is the Present Value of a perpetuity (paid at the beginning of each period)?

The Present Value (PV) of a perpetuity paid at the beginning of each period is calculated using the formula: $PV = \frac{(1+r)\cdot C}{r} = C + \frac{C}{r}$ where:

• $C$ is the cash flow per period,

• $r$ is the discount rate (interest rate).

What is the Present Value of a growing perpetuity (paid at the end of each period)?

The Present Value (PV) of a growing perpetuity is calculated using the formula: $PV = \frac{C}{r - g}$ where:

• $C$ is the cash flow for the first period,

• $r$ is the discount rate (interest rate),

• $g$ is the growth rate of cash flows (with r > g).

What is the Present Value of a growing perpetuity (paid at the beginning of each period)?

$$PV=\left(1+r\right)\cdot\frac{C}{r-g}$$

• $C$ is the cash flow for the first period,

• $r$ is the discount rate (interest rate),

• $g$ is the growth rate of cash flows (with r > g).

What is the Present Value of an annuity (paid at the end of each month)?

$$C\cdot\left(\frac{1}{r}-\frac{1}{r\cdot\left(1+r\right)^{t}}\right)=C\cdot AF^{}$$

• $C$ is the cash flow for the first period,

• $r$ is the discount rate (interest rate)

• t is the number of years

What is the Present Value of an annuity (paid at the beginning of each month)?

$$\left(1+r\right)\cdot C\cdot AF$$

• $C$ is the cash flow for the first period,

• $r$ is the discount rate (interest rate)

• t is the number of years

What is the Present Value of a growing annuity (paid at the end of each period)?

$$C\cdot\left(\frac{1}{r-g}-\frac{\left(1+g\right)^{t}}{\left(r-g\right)\cdot\left(1+r\right)^{t}}\right)=C\cdot GAF$$

What is the Present Value of a growing annuity (paid at the beginning of each period)?

$$\left(1+r\right)\cdot C\cdot GAF$$