7 - What happens to the present value of a cash flow stream...

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What happens to the present value of a cash flow stream when the discount rate increases? Place this in the context of an investment. If the required return on an investment goes up but the expected cash flows do not change, would you be willing to pay the same price for the investment or would you pay more or less for this investment than before interest rates changed? What future money is worth today is called its Present Value (PV), and what it will be worth in the future when it finally arrives is called not surprisingly its Future Value (FV). The right to receive a payment one year from now for $100 (the future value) might be worth today $95 (its present value). Present value is discounted below future value. When the analysis concerns a series of cash inflows or outflows coming at different future times, the series is called a cash flow stream. Each future cash flow has its own value today (its own present value). The sum of these present values is the Net Present Value for the cash flow stream. Many decisions in corporate finance require financial managers to calculate the present
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This note was uploaded on 10/15/2011 for the course FIN 550 taught by Professor Smith during the Spring '11 term at Berklee.

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7 - What happens to the present value of a cash flow stream...

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