Podcast
Questions and Answers
What is the Time Value of Money?
What is the Time Value of Money?
The Time Value of Money (TVM) is the concept that money available at the present time is worth more than the same amount of money in the future due to its potential earning capacity.
What is the formula for calculating the present value of an even future cash flow?
What is the formula for calculating the present value of an even future cash flow?
PV = 1- (1 + i)^-n / i
What is the formula for calculating the Annual Percentage Rate (APR)?
What is the formula for calculating the Annual Percentage Rate (APR)?
Annual Percentage Rate = (1 + r/m)^m - 1
What is the decision rule for the Net Present Value (NPV) method of capital budgeting?
What is the decision rule for the Net Present Value (NPV) method of capital budgeting?
Signup and view all the answers
Study Notes
Time Value of Money
- Concept: Money available at the present time is worth more than the identical sum in the future due to its potential earning capacity.
Calculating Loan Payments
- Example: A loan of P 120,000 with 12% interest over 5 years requires a payment of P 33,289.18 per year. This is calculated to account for reducing loan balance and interest over time.
- Data Table: Breakdown of payment into allocated interest and principal reduction components for each of the 5 loan payments.
Net Present Value (NPV)
- Definition: The difference between the present value of cash inflows and the present value of cash outflows over a period of time.
- Decision Rule: Projects with a positive NPV are considered acceptable investments. Conversely, those with a negative NPV are rejected.
Calculating NPV (Even Cash Flows)
- Formula: PV = [1-(1+i)^-n]/i where... -PV = Present value -i = interest rate -n = number of periods
Calculating NPV (Uneven Cash Flows)
- Formula: PV = FV / (1 + i)^n where ... -FV = future value -i = interest rate -n = number of time periods
Example NPV Calculation
- Scenario: Kim Corporation's four-year project with a P 6,854.00 initial investment.
- Calculations: The project's NPV of P 700.00 is positive. This implies that the investment is profitable.
- Details: Detailed calculation including interest rates, cash inflows and their time-adjusted values is presented.
Annual Percentage Rate (APR)
- Definition: Annualized interest rate representing the total cost of borrowing over a year, including compounding effect.
- Formula: APR =(1 + r/m)^m - 1 where... - r =Nominal rate - m =number of compounding periods per year
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
This quiz covers key concepts related to the Time Value of Money, including calculating loan payments and understanding Net Present Value (NPV). Test your knowledge on how present value affects investment decisions and the implications of interest rates. Explore the formulas and examples that illustrate these financial principles.
