LECTURE4

# LECTURE4 - Lecture 4 Lecture Net Present Value(NPV NPV...

This preview shows pages 1–8. Sign up to view the full content.

Lecture 4 Lecture 4 Net Present Value (NPV) Net Present Value (NPV)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
NPV calculation : single period case r C C NPV + + - = 1 1 0 0 C r C + 1 1 1 C initial cash outflow cash inflow in one period present value of next period’s cash flow
NPV calculation : multiple periods, annual compounding The interest compounds when the yield on an investment is reinvested 1881 1 \$ 09 1 09 1 1 \$ . . . = × × FV of \$1 invested for 2 years at the compound interest rate of 9% per year 842 . 0 \$ 09 1 1 09 1 1 1 \$ = × × . . PV of \$1 to be received in 2 years with 9% annual interest rate FV of an investment C after T years of earning compound interest r ( 29 T r C FV + × = 1 PV of a cash flow C to be received T years into future ( 29 ( 29 T T r C r C PV + × = + = 1 1 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
NPV of a stream of cash flows ( 29 ( 29 ( 29 ( 29 = + + - = + + + + + + + - = T i i i T T r C C r C r C r C C NPV 1 0 2 2 1 0 1 1 1 1 ( 29 T C C C C , , , , 2 1 0 - Present value factor ( 29 T r + 1 1 NPV calculation : multiple periods, annual compounding (continued)
NPV calculation : multiple periods, within year compounding Compounding for m periods within the year r m r Stated Annual Interest Rate (SAIR) (SAIR) Interest for each of m periods m m r C + 1 2 1 + m r C + m r C 1 C m periods Next year Now FV of an investment C after T years T m m r C FV + × = 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Example Example ( 29 89 . 47 09 . 1 700 09 . 1 500 1000 2 = + + - = NPV What happens if the interest is compounded semi annually ? ( 29 ( 29 89 . 47 86 . 44 045 . 1 700 045 . 1 500 1000 2 09 . 0 1 700 2 09 . 0 1 500 1000 4 2 2 2 2 < = + + - = + + + + - = × NPV Consider an investment of \$1,000 that is expected to yield \$500 in 1 year and \$700 in 2 years. What is the NPV of the investment at an annual discount rate of 9% ?
EAIR is defined as ( 29 m m r + = + 1 1 ρ Effective annual interest rate Effective annual interest rate (EAIR) (EAIR) 09 . 0 092 . 0 1 2 09 . 0

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern