Section 2 Financial Math Time Value of Money chpt 56 Multi period projects time

# Section 2 financial math time value of money chpt 56

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Section 2: Financial Math (Time Value of Money) chpt 5&6 - Multi-period projects - time - risk is not considered (assume that the future is known)

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Issues to Consider: - Interest: simple or compound? - The frequency of compounding? - Single cash flow or multiple sash slows? - investment horizon or term of the contract? - discrete or continuous compounding? - Multiple payments are fixed or variable? Present Value and Future Value - P = Present value - F = Future value - n = # of periods, n= (m)(y) - m = frequency of payments during the year - y = # of years - k = nominal rate of interest - r = effective annual rate - r > k - F = P(1+ kn) - P = F(1+kn)^-1 - n = F-P/(P)(k) - k = (F-P) Compound Interest - Fn = future value at time n o F1 = P (1+k) o F2 = P(1+k)^2 - Fn = P(1+k)^n - P = Fn(1+k)^-n Lecture 7: Sept 24 th Number of periods (find n) Intraperiod compounding - Lecture 10: Oct 1 st Section 3: Capital Budgeting 1. Introduction 2. Investment Criteria
3. Capital Budgeting under inflation (1,2,3 Ch. 9) 4. Taxes and capital budgeting (Ch. 10) Introduction 1. Issues - What to invest in? - How much to invest? - Internal vs. external 2. Assumptions - Required return (k) is given - Cash flows are certain - Adding new projects does not affect k 3. Basic idea - Cost benefit analysis o costs > benefit - reject the investment o benefit > costs - accept the investment - Costs are simply cash outflows - Benefits are simply cash inflows Types of projects 1. Economically independent: operation CF’s and likelihood of acceptance do not depend on acceptance/ rejection of another project Mid-term review Content - 30 questions -> 10 questions per part - 2 hours -> 4 mins/question - All m/c questions - 50 qualitative 50 quantitative Chapter 1: Introduction to corporate finance Chapter 5: Introduction to valuation, the time value of money Chapter 6: Discounted cash flow valuation Chapter 9: Net present value and other investment criteria Concepts:

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Chapter 9 Net present value (NPV): The difference between the investments market value and its costs, a measure of how much value was added or created today by undertaking an investment.
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