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Unformatted text preview: • Net working capital-Current Assets minus Current Liabilities • The Net Present Value ( NPV ) of an investment is the present value of the expected cash flows, less the cost of the investment. o NPV better than IRR o IRR pick one project, mutually exclusive, multiple IRRs needed, scale problems o Payback doesn’t consider discounting, time value of money, risk, etc. • FV = C ×(1 + r ) T • Where C is cash flow at date 0, r is the appropriate interest rate, and T is the number of periods over which the cash is invested. • Compounding interest: T m m r C FV × + × = 1 (m is times compounded annual) • EAR= m n m r × + 1 • the annual rate that would give us the same end-of-investment wealth • FV = C × e rT • Perpetuity- A constant stream of cash flows that lasts forever • r C PV = • Growing perpetuity- A stream of cash flows that grows at a constant rate forever • g r C PV- = • Annuity- A stream of constant cash flows that lasts for a fixed number of periods • +- = T r r C PV ) 1 ( 1 1 • Growing annuity- A stream of cash flows that grows at a constant rate for a fixed number of periods • + +-- = T r g g r C PV ) 1 ( 1 1 • CH. 5 BondsCH....
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