Corporate Finance page 6 - - - After tax interest rate: r...

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- - After tax interest rate: r – (t X r) = r(1- t) - We will base the discount rate that we use to evaluate cash flows on the investor’s opportunity cost of capital (or more simply, the cost of capital) which is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted Chapter 4: - Three rules of time travel: 1. You can only compare or combine values at the same point in time. 2. To move a cash flow forward in time, you must compound it. 3. To move a cash flow back in time we must discount it. - Future value – value of cash flow if you move it forward in time - Time value of money – equivalent value of two cash flows at two different points in time - Earning interest on interest is compound interest - Future value of a cash flow = C X (1+r)^n - PV = C/(1+r)^n and FV= C X (1+r)^n - The power of compounding: Because interest is paid on past interest, the future value grows exponentially - Present Value of a cash flow stream = PV = Sum Cn/(1+r)^n
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This note was uploaded on 01/11/2011 for the course ENG 120 taught by Professor Kaminsky during the Fall '10 term at University of California, Berkeley.

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Corporate Finance page 6 - - - After tax interest rate: r...

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