corporate-finance

3000 2000 1000 present value with r 10 0 1 2 3 100011

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Unformatted text preview: he income stream of €1,000, €2000 and €3,000 in year 1, 2 and 3 from now, respectively. €3,000 €2,000 \$1,000 Present value with r = 10% 0 1 2 3 €1000/1.1 = € 909.1 €2000/1.12 = €1,652.9 €3000/1.13 = €2,253.9 €4,815.9 - - The present value of each future cash flow is calculated by discounting the cash flow with the 1, 2 and 3 year discount factor, respectively. Thus, the present value of €3,000 received in year 3 is equal to €3,000 / 1.13 = €2,253.9. Discounting the cash flows individually and adding them subsequently yields a present value of €4,815.9. 3.5 Net present value Most projects require an initial investment. Net present value is the difference between the present value of future cash flows and the initial investment, C0, required to undertake the project: Ci i 1 (1  r ) n (6) NPV = C 0  ¦ i Note that if C0 is an initial investment, then C0 &lt; 0. 3.6 Perpetuities and annuities Perpetuities and annuities are securities with special cash flow characteristics that...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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