1
Capital Budgeting: Part 1
Adam Presslee
Office: HH384
Email: [email protected]
Introduction to Capital Budgeting:
Capital budgeting is a systematic approach to
evaluating longterm investments and/or
financing decisions
Central to longterm decision making is the time
value of money
If the option exists to earn positive returns on investment
(similar to opportunity cost), than $1 today is more valuable
than $1 in 5 years
Present and Future Value:
Present value represents the amount today of a
future investment, assuming a stated number of
periods and a static interest rate
Future value represents the amount that today’s
investment will be in the future, assuming a
stated number of periods and a static interest rate
PV
=
FV
/(1
+
Interest
)
years
FV
=
PV
*(1
+
Interest
)
years
Present Value of Annuity:
The present value of an annuity represents the
amount today of a regular periodic payment,
assuming a stated number of periods and a static
interest rate:
PV
A
=
Annuity
*
Factor
Interest
,
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 Spring '09
 R.DUCHARME
 Time Value Of Money, Future Value

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